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Digitized  by  the  Internet  Archive 

in  2008  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/businesseconomicOOboga 


BUSINESS  ADMINISTRATION 


The  texts  listed  on  this  page  form  the  basic  material  for  the 
LaSalle  Business  Administration  Course  and  Service.  They 
constitute  a  library  of  standard  practice  in  all  the  important 
divisions  of  business  management. 


Titles 
BUSINESS  PSYCHOLOGY 


Authors 


Hugo  Munsterberg,  Ph.D.,  M.D.,  LL.D. 

Harvard    University 

PERSONAL  EFFICIENCY,  AP- 
PLIED SALESMANSHIP, 
AND  SALES  ADMINISTRA- 
TION   Irving  R.  Allen 

Sales  Counselor 

BUSINESS  LAW  I r 

A   Samuel  D.  Hirschl,  S.B.,  J.D. 

l-         Member  of  the  Illinois  Bar 

Edwin  Herbert  Lewis,  Ph.D.,  LL.D. 

Lewis  Institute,  Chicago 

Ernest  Ludlow  Bogart,  Ph.D. 

University  of  Illinois 

Hugo  Diemer,  M.E. 

Pennsylvania   State   College 
Henry  Parker  Willis,  Ph.D. 

Secretary,  Federal  Reserve  Board 

Louis  Gueniher 

Editor,   "Financial   World" 

Maurice  H.  Robinson,  Ph.D. 

University  of  Illinois 

Elmer  H.  Youngman 

Editor,  "Bankers  Magazine" 

E.  H.  Kastor 

H.  IV.  Kastor  &  Sons 

Paul  Neystrom,  Ph.D. 

Uniziersity  of  Minnesota 

Edward  M,  Skinner 

Manager,   Wilson  Bros. 

R.  S.  White 

American  Steel  &  Wire  Co. 

H.  E.  Kramer 

I.  L.  Sharfman,  Ph.D. 

University  of  Michigan 


BUSINESS  LAW  II      .     .     . 

BUSINESS  ENGLISH       .     . 

BUSINESS  ECONOMICS      . 

INDUSTRIAL   ORGANIZA- 
TION AND  MANAGEMENT 

MONEY  AND  BANKING      . 

INVESTMENTS   AND   SPECU 
LATION 


ORGANIZING  A  BUSINESS 
FINANCING  A  BUSINESS  . 

ADVERTISING 

RETAIL  MERCHANDISING 


CREDITS  AND  COLLEC- 
TIONS      


TRANSPORTATION   AND 
TRAFFIC 


OCEAN  TRAFFIC  AND 
TRADE    


B 


ACCOUNTING 


OFFICE  ORGANIZATION  AND 
MANAGEMENT    


Olney  Hough 

Editor,  "American  Exporter" 

Henry  Parker  Willis,  Ph.D. 


C.  C.  Parsons 

Manager,  Shaw-Walker  Co. 


LaSalle  Extension  University 


BUSINESS  ECONOMICS 


ERNEST  L.  BOGART,  Ph.D. 

Professor  of  Economics,    University  of  Illinois;     Author  of  Economic 
History  of  the   United  States,  Financial  History  of  Ohio,  etc. 


La  Salle  Extension  University 
*     C  hi  c  a  gf  o 

1915 


J- 


i"   <J  \J   Cv     5 


Copyright,  1915 
LaSalle  Extension  University 


-H6 

\1 1 
6t^ 


CONTENTS 


I.     The  Modern  Industrial  System 

The  IManorial  System 1 

Private  Property   3 

The  Nature  of  Competition 4 

Industrial  Liberty 5 

Industrial  Society   5 

Capital  in  Modern  Industry 6 

Labor  in  Modern  Industry 7 

The  State  and  Modern  Industry 8 

II.     The  Agricultural  Resources  of  the  United 
States 

The  Land  Policy  of  the  United  States 10 

Irrigation 13 

Dry-Farming    14 

Size  of  Farms 14 

Farm  Tenure  16 

The  Rural  Exodus 17 

Importance  of  Agriculture 18 

Agricultural  Products    18 

Extensive  and  Intensive  Farming 19 

Agriculture  as  a  Science 20 

Cereals  20 

Live   Stock    21 

Cotton    23 

Forests 24 

^                            Fisheries    25 

>^                            Natural  Resources  and  Economic  Laws 26 

C                            Law  of  Increasing  Returns 26 

^                            Law  of  Diminishing  Returns 27 

"  III.    The  Mineral  Resources  op  the  United  States 

^                             Character  of  Natural  Resources 29 

iii 


iv  Contents 

Two  Views  of  Conservation 30 

A  Rational  Policy  of  Conservation 31 

Coal    32 

Petroleum    34 

Iron    36 

Precious  Metals   38 

Copper 39 

Our  Debt  to  Nature 40 

Water  Power   40 

IV.     Capitalistic  Production 

Use  of  Capital  in  Production 45 

The  Nature  of  Capital 45 

Progress  in  Capitalistic  Production 47 

Causes  of  Industrial  Progress 48 

The  Factory  System 49 

Division  of  Labor 49 

Use  of  Machineiy 51 

Localization  of  Industry 52 

Production  on  a  Large  Scale 53 

Economies  of  Large-Scale  Production 56 

Widening  of  the  Market.  .^ 57 

Concentration  in  Other  Inc^Btries 58 

Effects  of  Industrial  Concentration 59 

Standardization    i 59 

Interchangeable  Parts 60 


V.     Trusts  and  Monopolies 

The  Combination  Movement 62 

Individual  and  Partnership  Organization 64 

Corporations 64 

Trusts  65 

Causes  of  the  Trust  Movement 66 

Economies  in  ^Marketing 67 

Economies  in  Integration 68 

The  Influence  of  Promotors 69 

Miscellaneous  Causes  of  Trusts 69 

Economic  Effects  of  Trust 72 

Trusts  and  Labor 73 

Monopoly  Control  and  Prices 74 

Monopoly  and  Individual  Opportunity 76 

Monopoly  Evils   77 


Contents  v 

VI.     Speculation  and  Crises 

Speculative  Risks  in  Industry 79 

Function  of  the  Speculator 80 

Services  of  Stock  and  Produce  Exchanges 80 

Benefits  of  Speculation 81 

Illegitimate  Speculation 82 

Crises 84 

VII,     The  Modern  Wage  System 

The  Factory  System  and  Labor 91 

The  Wage-Earning  Class   92 

Dependence  of  the  Wage-Earner 93 

The  Wage  System 94 

The  Evolution  of  the  Wage  Contract 95 

Public  Regulation  of  Labor  Conditions 97 

Labor's  Bargaining  Power 98 

Necessity  of  Protective  Legislation 99 

VIII.     Labor  Organizations  and  Collective  Bargaining 

Causes  of  Labor  Organizations 102 

Types  of  Labor  Organizations 102 

National  Organizations 103 

Objects  and  Methods  of  Labor  Unions 104 

Standard  Rate  of  Pay 106 

Reduction  in  Working  Hours 108 

Restriction  of  Output 110 

Fraternal  Benefits  of  Labor  Unions 112 

Collective  Bargaining  113 

Strikes  and  Lockouts 114 

Conciliation  and  Arbitration 114 

IX.     Woman  and  Child  Labor 

Early  Origin    117 

The  Field  of  Employment 118 

Effect  of  Woman  Labor  Upon  the  Occupation 

of  Men 119 

Wages  of  Women 120 

The  Effects  of  Woman  Labor 122 

Readjustment  of  Woman's  Work 123 

Child  Labor   124 

Evils  of  Child  Labor 125 

Labor  Legislation   126 

Factory  Acts   127 

Minimum  Wage  Legislation 129 


vi  Contents 

X.     Unemployment  and  Insurance 

Extent  of  Unemployment 132 

Classification  of  the  Unemployed 133 

Causes  of  Unemployment 134 

Remedies  for  Unemployment 138 

Industrial  Accidents 140 

,  Causes  of  Accidents 142 

Employers'  Liability   143 

Workmen 's  Compensation   143 

Sickness,  Old-Age,  and  Unemployment  Insur- 
ance   145 

Old- Age  Pensions  in  the  United  States 146 

XI.     Machinery  and  Industrial  Efficiency 

Evils  of  Machinery 149 

Displacement  of  Labor  by  Machinery 149 

Is  New  Employment  Created  ? 151 

Irregularity  of  Employment 153 

Lowering  of  the  Grade  of  Labor 153 

Monotony  of  Work 154 

Conclusions  as  to  Machinery 155 

Industrial  Education    156 

Need  of  Better  Training 159 

XII,     Profit-Sharing  and  Co-operation 

The  Nature  of  Profit-Sharing 162 

Advantages  of  Profit-Sharing 163 

Objections  to  Profit-Sharing 164 

Future  of  Profit-Sharing 166 

Co-operation   167 

Consumers'  Co-operation  in  England 167 

Experiments  in  the  United  States 169 

Methods  of  Distribution 169 

Producers'  Co-operation 170 

Financial  Co-operation  171 

Advantages  of  Co-operation 172 

Disadvantages  of  Co-operation 173 

XIII.     Money  and  Banking 

Credit  Economv 176 

Value  of  Money 177 

Rising  and  Falling  Prices 178 

Bimetallism  179 

Government  Paper  Money 180 


Contents  vii 

Kinds  of  ^Money  in  the  United  States 181 

The  Function  of  Credit 181 

Banks 182 

Elasticity  of   Currency 183 

The  Federal  Reserve  System 184 

Asset  Currency    185 

Savings  Banks   185 

XIV.      TRANSrORTATION  AND  COMMUNICATION 

Monopolistic  Nature  of  Transportation  Service.  187 

Railroad  Consolidation 188 

Railroad  Rates  189 

Governmental  Regulation  of  Railroads 190 

Public  Ownership    191 

Other  Transportation  Agencies 191 

Telephone  and  Telegraph 192 

Water  Transportation    193 

Canals   193 

The  American  Merchant  Marine 194 

XV,  Problems  op  Distribution 

Nature  of  the  Problem 198 

Kinds  of  Distril)ution 199 

Importance  of  Distribution 200 

Bases  for  Distribution 201 

Rent   202 

Interest 204 

Profits 206 

Wages ■ 207 

Inequality  in  Earning  Power 209 

Distribution  of  Fortunes 211 

Causes  of  Fortunes  in  the  United  States 212 

Tendencies  213 

XVI.  Saving  and  Spending 

The  Rational  Use  of  Wealth 215 

Economy  in  Consumption 220 

The   Relation   of    Consumption    to   Productive 

Efficiency 221 

The  Nature  of  Saving  and  Spending 222 

The  Fallacy  of  Making  Work 224 

Useful  Savings   225 

The  Waste  of  Luxuries 225 

The  Need  of  Luxuries 227 


viii  Contents 

The  Intermediate  View  228 

The  Socialization  of  Wealth 229 

XVII.     Taxation  and  Tariff 

The  Nature  of  Taxes 231 

Rules  of  Taxation 232 

Bases  of  Taxation 233 

Progressive  Taxes   233 

Direct  and  Indirect  Taxes 235 

The  General  Property  Tax 236 

Inheritance  Taxes  237 

Growth  of  Public  Debts 238 

The  Tariff 238 

Conclusion  241 

XVIII.     The  Functions  of  Government 

The  Primary  Functions  of  the  State 243 

The  Regulative  Functions  of  the  State 244 

The  Economic  Functions  of  the  State 244 

Limits  of  State  Action 245 

Anarchism    245 

Extreme  Individualism 246 

Modified  Individualism 247 

The  Culture  State  Theory 247 

Socialism   248 

The  Single  Tax 253 

Public  Ownership   253 

XIX.     Economic  Progress 

Progress  in  the  Field  of  Labor 255 

Progress  in  Production    256 

Problems  in  Distribution   257 

Distribution  of  the  Social  Income 258 

Increased  Command  over  Comforts 259 

The  Future 260 


BUSINESS  ECONOMICS 

CHAPTER  I 

the  modern  industrial  system 

The  Manorial  System 

We  shall  probably  get  the  clearest  idea  of  the  com- 
plexity of  our  modern  industrial  society  if  we  contrast  it 
briefly  with  the  simpler  state  of  social  organization  which 
preceded  it.  For  this  purpose  we  may  take  the  English 
manor  of  the  eleventh  century.  At  that  time  England 
was  purely  agricultural,  and  the  whole  country  was 
divided  into  manors,  of  which  the  lord  was  regarded  as 
the  owner,  under  feudal  conditions,  while  those  who  culti- 
vated the  land  were  his  tenants.  These  tenants — villeins 
and  cotters — worked  on  the  lord 's  land  two  or  three  days 
in  the  week,  and  the  rest  of  the  time  they  devoted  to  the 
cultivation  of  their  own  holdings. 

The  whole  of  the  land  of  the  manor,  both  that  of  the 
lord  and  that  of  the  tenants,  was  cultivated  on  an  elabo- 
rate system  of  joint  labor.  The  land  was  divided  into 
strips  of  about  half  an  acre  each,  and  a  man's  holding 
might  consist  of  a  dozen  or  more  of  these  strips  scattered 
about  in  different  parts  of  the  manor.  This  was  done  in 
order  to  secure  equality  in  the  fertility  and  location  of 
each  man's  land.  At  that  time  the  prevailing  method  of 
agriculture  was  known  as  the  three-field  system,  in  which 
one  field,  comprising  about  one-third  of  the  manor  and 

1 


2  Business  Economics 

containing  a  portion  of  the  scattered  strips  of  land  belong- 
ing to  the  lord  and  every  tenant,  was  planted  with  wheat, 
a  second  field,  comprising  another  third  of  the  culti- 
vated land,  was  planted  with  barley  or  oats,  while  the 
third  field  was  left  fallow.  The  second  year  saw  the  sec- 
ond stage  of  this  three-year  rotation,  one-third  of  the 
manor  lying  fallow  each  year  to  recuperate  from  this 
exhausting  method  of  cropping;  artificial  manures  were 
unknown. 

Now  the  significant  characteristics  of  such  a  manorial 
society  were  three.  First,  it  was  economically  self-suf- 
ficient, that  is,  practically  everything  that  was  needed  or 
was  consumed  on  the  manor  was  produced  there.  There 
was  no  need  of  intercourse  with  the  outside  world  and 
there  was  little  contact  with  it.  Salt,  iron,  and  millstones 
w^ere  almost  the  only  commodities  that  the  inhabitants  of 
such  a  manor  had  to  buy  from  outsiders.  Consequently 
there  was  no  production  of  goods  for  a  market,  little 
money,  and  almost  no  trade.  The  few  things  that  were 
purchased  were  i^aid  for  at  prices  fixed  by  custom. 

Second,  agriculture  was  carried  on  under  a  system  of 
joint  labor  and  under  customary  methods  which  did  not 
change  from  generation  to  generation.  It  is  clear  that 
as  long  as  all  the  land  of  the  manor  was  thrown  together 
for  purposes  of  cultivation  into  fields  on  which  were 
planted  wheat  or  barley  or  which  lay  fallow,  no  one  indi- 
vidual could  cultivate  his  land  differently  from  his  neigh- 
bors. Indeed  the  holdings  of  the  different  tenants  were 
not  even  separated  by  fences,  but  only  by  ridges  of  grass. 
On  the  land  which  lay  fallow  the  cattle  were  turned  out  to 
graze;  if  any  man  had  attempted  to  plant  a  new  crop 
the  third  year,  his  neighbors '  cattle  would  have  devoured 
it  under  such  a  system.  Production  was  regulated  ab- 
solutely by  custom,  and  no  opportunity  was  given  for 


Modern  Industrialism  3 

the  development  of  the  inventiveness  or  initiative  of  the 
progressive  individual. 

Third,  the  tenants  were  personally  unfree,  that  is,  they 
did  not  have  the  liberty  of  moving  freely  from  place  to 
place,  but  were  bound  to  the  soil  which  they  cultivated. 
A  man  could  not  freely  choose  either  his  occupation  or 
his  residence.  There  was  no  mobility  or  freedom  of 
movement.  Labor  was  wholly  or  partly  compulsory,  and 
on  terms  rigidly  fixed  by  custom  or  by  superior  authority. 

Such  a  society  differs  from  that  of  today  in  almost 
every  point,  and  offers  a  startling  proof  of  how  far  we 
have  progressed  in  the  past  eight  or  nine  hundred  years. 
For  many  of  these  characteristics,  however,  we  do  not 
need  to  go  back  to  the  English  mediaeval  manor;  the 
plantation  of  the  South  two  generations  ago,  with  its 
system  of  slave  labor,  furnishes  an  illustration  more  fa- 
miliar to  most  of  us.  With  such  a  condition  of  industrial 
development  we  may  now  profitably  contrast  our  own  of 
the  twentieth  century.  The  chief  characteristics  of  the 
modern  industrial  system  are  the  institutions  of  private 
property,  of  competition,  and  of  personal  liberty. 

Peivate  Pbopeety 

The  institution  of  private  property  is  so  familiar  to  us 
and  so  fundamental  in  modern  economic  life  that  we  com- 
monly regard  it  as  a  natural  right.  Nevertheless  private 
property,  like  most  other  economic  institutions,  is  the  re- 
sult of  a  long  evolution.  Primitive  man  could  hardly 
have  had  the  conception  of  private  property,  and  when 
it  did  begin  to  emerge,  it  was  at  first  confined  to  movables. 
Indeed  we  may  say  that  on  the  mediaeval  English  manor 
the  private  ownership  of  land  did  not  yet  exist  in  the 
modern  sense.  It  was  found  that  when  each  cultivator 
was  permitted  to  fence  in  his  holding  and  to  call  it  his 


4  Business  Economics 

own,  he  cultivated  it  much  more  carefully  and  produced 
much  more.  Enclosure  led  to  private  property  in  land 
and  to  individual  freedom  in  its  use.  Today  in  the  United 
States  the  possession  and  transfer  of  landed  property  is 
almost  as  easy  as  that  of  movables. 

Private  property  must  be  justified  on  the  ground  of 
social  utility,  because  under  this  method  of  control  so 
much  more  is  produced  than  under  any  system  of  com- 
munal ownership  yet  tried.  But  objectors  are  not  want- 
ing who  contend  that  limits  should  be  placed  upon  this 
institution  and  that  the  right  of  use,  of  bequest,  and  pos- 
sibly of  unlimited  acquisition  should  be  brought  under 
social  control.  The  beneficence  of  private  property  turns 
largely  upon  the  existence  of  competition  and  individual 
liberty,  and  to  these  we  must  now  turn. 

The  Natuee  of  Competition 

Competition  is  defined  as  ''the  act  of  seeking  or  en- 
deavoring to  gain  what  another  is  endeavoring  to  gain 
at  the  same  time. ' '  But  competition  in  modem  industrial 
life  is  not  merely  a  struggle  to  appropriate  an  existing 
good.  The  very  contest,  as  over  the  control  of  a  market, 
may  and  probably  will  lead  to  cheaper  and  larger  produc- 
tion and  thus  to  the  benefit  of  society.  Competition  is  a 
selective  process  in  our  modern  economic  society,  and 
through  it  we  have  the  survival  of  the  fittest  ' '  Competi- 
tion, ' '  so  runs  the  proverb, '  *  is  the  soul  of  trade. ' '  There 
is,  to  be  sure,  a  dark  side  to  the  picture,  for  economic 
competition  involves  the  defeat  of  the  weaker  party,  but 
this  does  not  necessarily  mean  his  destruction,  for  his 
very  failure  may  sharpen  his  faculties  and  secure  his  ulti- 
mate success  or  at  worst  he  may  find  employment  under 
his  successful  rival.  But  here  again  it  is  being  urged 
that  competition  is  brutal  and  that  we  should  go  back  to 


Modern  Industrialism  5 

the  mediaeval  method  of  regulation  by  custom  or  resort 
to  combination  and  monopoly.  We  are  now  witnessing 
experiments  in  both  directions,  but  competition  still  re- 
mains the  controlling  force  of  modern  economic  society 
and  bids  fair  to  continue  so.  It  should  however  be  the 
function  of  society  to  raise  the  ethical  level  of  com- 
petition. 

Industrial  Liberty 

Industrial  liberty  has  been  developed  even  more  slowly 
and  painfully  than  the  institution  of  private  property  and 
has  in  some  instances  not  yet  been  wholly  won.  Slavery 
and  serfdom  have  given  way  before  the  higher  and  more 
beneficent  conception  of  freedom  or  liberty.  We  believe 
today  that  a  man  generally  knows  what  is  best  for  him 
and  will  utilize  his  opportunities  to  the  best  advantage; 
that  by  giving  him  a  maximum  of  freedom  the  welfare  of 
society  will  at  the  same  time  be  best  promoted.  Conse- 
quently in  our  modern  industrial  society  a  man  is  given 
not  only  social  and  religious  liberty,  but  freedom  to  move, 
to  choose  his  occupation,  to  produce  and  to  trade,  to  asso- 
ciate with  his  fellows,  and  to  expend  his  income  as  he 
pleases.  But  here  again,  while  the  prevailing  rule  is  lib- 
erty, society  has  found  it  necessary  to  lay  restrictions 
upon  the  abuse  of  this  liberty.  It  is  not  enough  even  to 
regard  the  industrial  world  as  a  great  game  in  which  each 
may  act  as  he  pleases  provided  only  he  observes  the  rules 
of  the  game.  A  higher  conception  of  responsibility  and 
duty  must  accompany  freedom  of  action  if  we  are  to  se- 
cure the  best  results. 

Industrial  Society 

The  term  ''industrial  society"  has  already  been  fre- 
quently used  and  needs  a  somewhat  fuller  explanation. 


6  Business  Economics 

About  the  year  1760  there  took  place  in  England  what  is 
usually  called  the  Industrial  Revolution.  A  number  of 
inventions  were  made  which  rendered  it  possible  to  use 
steam-driven  machinery  in  the  manufacture,  first,  of 
textiles  and  then  of  other  goods.  Manufactures  were  re- 
moved from  the  home,  where  they  had  hitherto  been  car- 
ried on,  to  the  factory.  Capital  began  to  be  used  in  large 
masses ;  machinery  displaced  hand  tools ;  and  the  laborer 
ceased  to  own  the  implements  with  which  he  worked. 
Men,  machines,  and  capital  were  massed  in  the  factory 
and  organized  under  the  management  of  a  new  set  of 
industrial  organizers  for  the  purpose  of  producing  goods 
for  a  world  market.  The  development  of  such  an  indus- 
trial society  has  been  attended  by  the  minute  division  of 
labor,  by  a  growing  separation  of  classes,  by  concentra- 
tion of  the  population  in  urban  centers,  by  the  increasing 
cost  and  complexity  of  machinery,  by  the  development  of 
improved  methods  of  transportation  and  of  credit,  by  the 
combination  of  labor  and  of  capital,  by  an  enormous  in- 
crease of  production,  and  by  the  growing  concentration 
of  wealth. 

Capital,  in  Modekn  Industry 

The  introduction  of  power  manufacture  completely 
revolutionized  industry.  The  independent  workman  with 
his  own  tools  was  superseded  by  the  factory;  the  small 
producer  has  given  way  in  turn  to  the  trust.  With  the 
introduction  of  expensive  machinery  it  became  necessary 
to  organize  capital  on  a  large  scale.  Corporations  with 
limited  liability  were  organized  for  the  manufacture  of 
goods,  the  exploitation  of  mines,  the  building  of  railroads, 
and  the  carrying  on  of  trade.  As  methods  of  production 
improved,  industry  became  more  and  more  concentrated, 
and  finally  huge  trusts  took  over  the  operation  of  com- 


Modern  Industrialism  7 

bined  plants.  The  business  unit  has  grown  increasingly 
larger,  and  the  need  and  power  of  capital  have  become  in- 
creasingly important.  Capital  has  played  a  role  of  grow- 
ing significance  and  has  become  more  and  more  powerful 
in  modern  economic  life.  Indeed  the  name  ''capitalistic 
production"  has  been  applied  to  modern  industry  because 
of  the  predominant  importance  of  capital  in  all  lines  of 
wealth  production. 

Impersonal,  growing  by  sheer  force  of  its  own  mo- 
mentum, capital  is  often  thought  of  as  intensely  selfish 
and  even  cruel.  Abuses  which  have  arisen  in  the  develop- 
ment of  modern  capitalistic  industry  must  be  remedied, 
but  attacks  upon  capital  itself  are  misguided  and  rest 
upon  a  mistaken  analysis  of  methods  of  production. 

Labok  in  Modern  Industry 

Before  the  introduction  of  the  factory  system,  under 
the  so-called  "domestic"  system  of  industry,  the  laborer 
carried  on  his  work  in  his  own  home,  where  he  provided 
the  raw  material,  owned  his  own  tools,  furnished  the  mo- 
tive power — his  muscles,  and  was  his  own  master.  Today 
every  one  of  these  conditions  is  changed.  The  work  is 
carried  on  in  the  factory ;  the  raw  material,  the  tools,  and 
the  motive  power  are  all  provided  by  the  capitalist,  the 
laborer  contributing  only  his  o^vll  more  or  less  skilled 
labor,  while  the  conditions  under  which  he  carries  on  his 
work  are  largely  determined  for  him.  He  is  no  longer 
his  own  master.  To  protect  himself  against  the  growing 
power  of  capital  the  worker  has  organized  with  his  fel- 
lows into  trade  unions.  These  seek  to  meet  the  monopo- 
listic power  of  capital  by  exerting  a  monopolistic  control 
over  labor.  While  they  realize  that  modern  productive 
processes  cannot  be  carried  on  without  capital,  they  also 
insist  that  labor  is  equally  essential.     They  claim  that 


8  Business  Economics 

capital  has  received  more  than  its  fair  share  of  their  joint 
production  and  has  exploited  labor;  consequently  they 
insist  that  labor  must  now  demand  its  just  reward  and 
enforce  the  claim  by  strikes  and  by  raising  wages.  To 
enforce  their  monopoly,  the  policy  of  the  closed  shop  is 
often  advocated.  The  interests  of  capital  and  labor  have 
thus  often  been  made  to  appear  antagonistic  instead  of 
complementary  to  one  another.  Frequently  in  their 
struggles  the  interests  of  the  consumer  have  been  entirely 
lost  sight  of. 

The  State  and  Modern  Industry 

These  conflicts  in  the  productive  processes  of  modern 
economic  society  have  led  many  people  to  look  to  the  state 
as  the  regulator  of  industry  and  to  invoke  state  aid  or 
state  intervention  along  many  lines.  Maladjustments  in 
the  labor  contract,  mistaken  production,  leading  perhaps 
to  speculation  and  financial  panics,  abuses  of  power  by 
corporate  interests,  discriminations  by  railroads,  and 
similar  irregularities  are  made  the  excuse  for  an  appeal 
to  state  authority.  Some  would  even  go  so  far  as  to  have 
the  state  take  over  and  manage  all  productive  enter- 
prises; but  socialism  is  as  yet  a  protest  rather  than  a 
constructive  force. 

In  the  last  analysis  the  state  is  the  regulator  of  all  in- 
dustrial undertakings,  for  they  all  concern  society.  The 
state  must  hold  the  balance  even  and  see  that  fair  play 
is  given  to  all  groups  and  all  classes;  but  the  greatest 
amount  of  freedom  compatible  with  economic  justice 
must  be  sought  for.  It  is  a  difficult  question  how  far  the 
state  must  interfere  in  the  conduct  or  management  of 
industrial  enterprises  in  order  to  secure  social  justice. 
There  is  at  present  a  decided  tendency  to  a  strengthening 
of  the  regulative  power  of  the  state  for  the  protection  of 


Modern  Industrialism  9 

the  weaker  classes  of  society.  And  yet  on  the  whole  the 
institutions  of  private  property,  free  competition,  and  a 
maximum  of  individual  liberty  remain  the  fundamental 
conditions  of  our  economic  life. 

But  while  under  the  system  of  individualism,  industrial 
activities  have  been  multiplied,  wealth  has  been  enor- 
mously increased,  and  human  progress  has  been  greatly 
advanced,  there  still  remain  many  abuses  and  evils. 
Many  practical  economic  problems  still  await  solution. 
Some  of  these  have  already  been  suggested  in  the  pre- 
ceding paragraphs ;  others  remain  to  be  presented.  It  is 
the  purpose  of  this  text  to  apply  to  some  of  the  more 
important  practical  current  problems  of  our  modern  in- 
dustrial life  the  principles  of  economic  science  and  to 
endeavor  to  reach  fair  and  just  conclusions  on  contro- 
verted points. 

TEST  QUESTIONS 

1.  What  were  the  three  distinguishing  characteristics  of  a 
manorial  society? 

2.  What  industrial  conditions  make  impossible  the  manorial 
form  of  industrial  organization  in  our  own  day? 

3.  What  justification  is  there  for  the  existence  of  private  prop- 
erty in  modern  industrial  society? 

4.  How  may  private  property  be  said  to  rest  upon  competi- 
tion? 

5.  Does  competition  tend  to  perpetuate  itself  or  does  it  lead 
inevitably  to  monopoly  ? 

6.  Can  personal  liberty  exist  in  a  state  of  free  competition? 

7.  Why  has  the  name  "capitalistic  production"  been  applied 
to  modern  industry  ? 

8.  What  were  the  chief  characteristics  of  the  domestic  system 
of  industry  ? 

9.  How  does  the  factory  system  differ  from  the  domestic  sys- 
tem? 

10.  What  is  the  position  of  labor  in  modern  industry? 


CHAPTER  II 
the  agricultural  resources  of  the  united  states 

The  Land  Policy  of  the  United  States 

The  land  area  of  the  United  States,  exclusive  of  Alaska 
and  our  island  possessions,  is  a  little  less  than  3,000,000 
square  miles,  or  an  area  somewhat  less  than  the  whole  of 
Europe  (3,700,000  square  miles).  Of  this  about  465,000 
square  miles,  or  a  little  more  than  one-sixth,  still  remain 
in  the  possession  of  the  federal  government  and  consti- 
tute the  public  domain.  The  rest,  except  that  which 
belonged  to  the  original  thirteen  states,  has  been  given 
to  railways  or  to  the  states  for  educational  purposes,  or 
has  been  sold  and  given  away  to  individual  settlers. 

In  the  disposition  of  the  public  domain  the  policy  of 
the  government  has,  on  the  whole,  been  to  place  it  as  rap- 
idly as  possible  in  the  hands  of  cultivators  and  also  to 
use  it  as  a  fund  to  promote  internal  improvements  and 
education.  About  200,000,000  acres  had  been  granted  to 
railroads  down  to  1871  (at  which  time  land  grants  were 
discontinued)  to  secure  their  early  construction. 

This  policy  has  often  been  bitterly  condemned,  and  it 
has  been  contended  that  the  land  should  have  been  saved 
for  actual  settlers.  It  may  however  be  said  that  without 
such  grants  the  railroads  would  not  have  been  built  at  as 
early  a  date  as  they  actually  were,  and  that  without  rail- 
roads the  land  was  practically  worthless,  as  it  was  too  far 
removed  from  any  navigable  waterway  to  have  access  to 

10 


Agricultural  Resources  11 

a  market.  Moreover  the  federal  treasury  lost  nothing, 
for  the  sections  of  land  alternating  with  those  granted  to 
the  railroads  were  sold  to  settlers  for  $2.50  an  acre  in- 
stead of  $1.25,  the  customary  price  for  the  public  lands. 

The  grants  of  land  for  educational  purposes  have  been 
generally  approved.  Upon  such  grants  rests  the  estab- 
lishment of  our  state  agricultural  colleges. 

The  unique  and  characteristic  feature  of  the  land  pol- 
icy of  the  United  States  has  been  the  granting  of  land  to 
the  settler  upon  actual  residence  and  cultivation  for  five 
years.  Such  a  grant  of  160  acres  is  called  a  "home- 
stead" and  since  1862  has  been  made  to  any  citizen  who 
is  the  head  of  a  family  or  above  the  age  of  twenty-one 
years.  In  this  way  over  230,000,000  acres  have  been 
placed  without  cost  in  the  possession  of  the  actual  culti- 
vators. The  newer  public  land  states  are  peopled  by  pro- 
prietors, and  there  has  never  grown  up  in  the  United 
States  a  large  class  of  rich  landowners  whose  land  is  cul- 
tivated by  a  tenant  peasant  class,  such  as  exists  in  Eng- 
land and  parts  of  Europe.  For  this  we  must  thank  not 
only  our  land  policy,  but  also  the  vast  extent  of  unoccu- 
pied land  that  might  be  had  almost  for  the  asking. 

Now,  however,  the  public  lands  available  for  agricul- 
ture have  been  exhausted ;  practically  all  that  remains  is 
situated  in  the  arid  zone  and  needs  systematic  irrigation 
before  it  can  be  made  available  for  any  use  except  that  of 
grazing.  There  are  still  many  acres  of  choice  land  in  In- 
dian reservations,  and  as  a  consequence  of  the  pressure 
upon  this  resource  and  also  because  of  the  improvidence 
of  the  old  reservation  system,  the  policy  has  now  been 
adopted  of  dividing  these  lands  among  the  Indians  in 
individual  ownership,  under  careful  safeguards,  and  of 
assimilating  the  Indians  to  the  rest  of  the  population. 


12 


Business  Economics 


IOWA 

ILLINOIS 

OHIO 

INDIANA 

DELAWARE 

MARYLAND 

KENTUCKY: 

MISSOURI 

NEW  YORK 

KANSAS 

PENNSYLVANIA 

NEW  JERSEY 

VIRGINIA 

TENNESSEE 

NEBRASKA 

VERMONT 

V^EST  VIRGINIA 

MINNESOTA 

CONNECTICUT 

MICHIGAN 

WISCONSIN 

SOUTH  CAROLINA 

GEORGIA 

RHODE  ISLAND 

NORTH  CAROLINA 

ALABAMA 

MISSISSIPPI 

MASSACHUSETTS 

SOUTH  DAKOTA 

NORTH  DAKOTA 

ARKANSAS 

OKLAHOMA 

NEW  HAMPSHIRE 

LOUISIANA 

OIST.  OF  COLUMBIA 

CAUFORNIA 

TEXAS 

WASHINGTON 

OREGON 

FLORIDA 

COLORADO 

IDAHO 

UTAH 

MONTANA 

WYOMINO 

NEVADA 

NEW  MEXICO 

ARIZONA 


National  Conservation  Commission 
Fig.  1.— Percentage  of  Improved  Land  to  Total  Area 


Agricultural  Resources  13 

Irrigation 

The  exhaustion  of  the  fertile  and  well-watered  lands 
of  the  Mississippi  Valley  has  forced  the  later  comers  to 
have  recourse  to  the  arid  soils  in  the  almost  rainless  re- 
gion west  of  the  one-hundredth  meridian  of  longitude. 
The  character  of  farming  under  such  climatic  conditions 
must  of  necessity  be  very  different  from  what  it  is  in  the 
rainy  districts,  and  the  versatility  and  adaptability  of  the 
American  farmer  are  well  illustrated  by  the  development 
which  has  taken  place  there.  The  first  effort  at  the  solu- 
tion of  the  problem  was  in  irrigation,  a  method  which  had 
been  early  practised  by  the  Pueblo  Indians,  and  later  and 
most  successfully  by  the  Mormon  settlers  in  Utah.  By 
1910,  according  to  the  census,  13,738,657  acres  were  under 
irrigation.  This  represents  an  increase  of  82.7  per  cent 
over  the  number  of  acres  under  irrigation  in  1900.  The 
total  cost  of  these  irrigation  works  in  1910  was  $307,860,- 
369.00,  or  $22.41  for  every  acre  actually  watered.  The 
annual  cost  of  operating  these  great  irrigation  works  was 
$1.07  per  acre. 

Up  to  1900  most  of  the  construction  work  had  been  done 
by  private  initiative  and  the  works  were  completed  at 
comparatively  small  cost,  because  the  most  readily  avail- 
able water  was  turned  upon  the  most  accessible  land.  Be- 
ginning about  1900,  very  strong  pressure  was  brought 
to  bear  upon  the  federal  government  to  assist  in  the  con- 
struction of  the  larger  and  more  expensive  irrigation 
systems  which  the  situation  called  for.  In  response  to 
this  demand.  Congress,  in  1902,  provided  for  the  building 
of  irrigation  works  out  of  the  proceeds  from  the  sales  of 
public  lands,  and  since  then  some  of  the  largest  irriga- 
tion systems  have  been  constructed  under  this  policy. 

As  one  sees  thousands  of  acres  of  land  which  formerly 
were  a  barren  waste  transformed  into  some  of  the  most 


14  Business  Economics 

fertile  and  productive  farms  in  the  country,  he  may  eas- 
ily become  eloquent  over  the  wonderful  possibilities  in 
irrigation.  This  enthusiasm  has  all  too  often  been  used 
by  unscrupulous  or  ignorant  promoters  in  selling  land 
or  irrigation  bonds,  and  the  losses  which  have  followed 
have  given  these  securities  a  bad  name  with  investors. 
We  should  bear  in  mind  that  there  are  limits  to  the  irri- 
gation developments  of  our  western  states.  The  water 
supply  is  limited  and  in  many  sections  has  already  been 
over-appropriated.  There  is  still  room  for  conservative 
expansion  and  for  more  intensive  use  of  the  resources 
now  available,  but  there  are  no  unlimited  opportunities. 
Experience  has  shown  that  regulation  and  conservation 
of  the  limited  water  supply  by  government  authority  are 
essential  to  the  success  of  irrigation. 

Dey-Farming 

A  second  and  even  more  interesting  development  of 
American  agriculture  is  the  so-called  dry-farming  which 
is  being  successfully  introduced  into  the  semi-arid  re- 
gions. Carefully  selected  seeds  and  plants  of  crops  espe- 
cially adapted  to  these  climatic  conditions  are  used,  and 
then  a  very  careful  and  intensive  method  of  tillage  is  fol- 
lowed. The  soil  is  plowed  deep  and  thoroughly  pulver- 
ized so  that  the  roots  can  strike  down  to  the  deeper  levels 
and  absorb  all  the  moisture  available.  Extraordinary  re- 
sults have  already  been  attained,  and  the  region  that  the 
older  geographies  labeled  ''The  Great  American  Desert" 
bids  fair  to  become  one  of  the  most  flourishing  districts 
of  the  country. 

Size  of  Faems 

That  part  of  the  area  of  the  United  States  which  has 
already  been  reduced  to  private  ownership  is  divided  into 


Agricultural  Resources 


15 


16  Business  Economics 

6,311,502  farms.  As  almost  half  of  the  land  in  these 
farms  is  uncultivated,  being  forest,  waste  land,  or  pas- 
ture, it  is  evident  that  there  is  still  room  for  a  great  in- 
crease in  the  agricultural  production  of  the  United  States 
without  bringing  additional  land  into  the  field.  The  aver- 
age size  of  these  farms  is  138  acres,  which  looms  large 
indeed  when  compared  with  the  20-acre  farms  of  France 
and  the  60-acre  farms  of  Great  Britain.  The  difference 
is  due  of  course  to  the  difference  in  the  methods  of  agri- 
culture and  the  character  of  the  crops,  the  European  con- 
ditions demanding  intensive  cultivation  while  our  meth- 
ods are  still  largely  extensive. 

Farm  Tenure 

A  more  important  question  even  than  the  number  and 
size  of  farms,  from  an  economic  point  of  view,  is  that  of 
ownership.  In  1880,  when  for  the  first  time  the  federal 
census  collected  the  statistics  of  farm  tenure,  the  gratify- 
ing result  was  announced  that  three-quarters  (74.5  per 
cent)  of  the  farms  in  the  United  States  were  cultivated 
by  their  owners.  The  last  census  however  showed  that 
the  proportion  had  fallen  to  62.1  per  cent  in  1910,  and 
alarm  has  been  expressed  that  our  democratic  conditions 
of  land  ownership  are  giving  way  to  a  system  of  tenantry, 
that  the  ow^nership  of  our  farms  is  being  concentrated  in 
fewer  hands,  and  that  methods  of  large-scale  production 
in  agriculture  are  crushing  out  the  independent  farmer 
as  effectively  as  they  have  crowded  out  the  small  manu- 
facturer and  retailer  in  other  fields.  Correctly  inter- 
preted, however,  the  statistics  seem  to  indicate  that  the 
growth  of  the  tenant  class  marks  the  endeavor  of  farm 
laborers  and  farmers'  sons  to  establish  themselves  as  in- 
dependent farmers  rather  than  the  fall  of  former  owners 
to  the  rank  of  tenants.    The  great  majority  of  the  young 


Agricultural  Resources  17 

men  are  laborers,  the  majority  of  those  in  middle  life  are 
tenants,  while  the  older  men  are  for  the  most  part  owners 
of  farms.  There  seems  to  be  a  healthy  progress  upward 
in  the  advancement  of  wage  laborers  and  farmers'  chil- 
dren, first,  to  tenancy,  and  finally,  wdth  increased  ability 
and  capital,  to  farm  ownership.  Moreover  most  of  the 
rented  farms  are  hired  by  negroes,  the  change  in  whose 
status  from  slave  to  tenant  marks  a  great  advance. 

The  Eural  Exodus 

Another  change  in  our  farming  population  that  has 
been  viewed  with  considerable  misgiving  is  the  movement 
from  the  farm  to  the  city  and  the  decline  in  the  propor- 
tion of  the  agricultural  population  to  the  whole.  Indeed 
the  change  has  been  startling,  as  the  United  States  has 
passed  from  a  primitive  agricultural  stage  of  develop- 
ment to  a  highly  organized  manufacturing  and  commer- 
cial stage.  From  86.3  per  cent  of  the  population  in  1820 
the  percentage  of  those  engaged  in  agriculture  fell  stead- 
ily until  it  reached  35.6  per  cent  in  1910.  Many  persons 
have  thought  that  such  a  movement  indicated  the  de- 
sertion of  our  farms,  owing  to  the  greater  attraction  of 
the  cities  and  the  disappearance  of  a  healthy  agricultural 
population.  It  has  indicated  rather  a  great  improve- 
ment in  the  arts  of  agriculture,  whereby  one  person  to- 
day, working  with  improved  machinery  and  better  knowl- 
edge, can  produce  nearly  three  times  as  much  as  his 
grandfather  did.  The  labor  set  free  has  gone  to  the 
cities — cities  of  over  8,000  inhabitants  now  containing 
two-fifths  of  our  population  as  compared  with  one-thir- 
tieth one  hundred  years  ago — and  there  produces  the 
thousand  and  one  things  which  contribute  to  our  modern 
well-being.  A  smaller  number  can  now  raise  all  the  food 
necessary  to  feed  the  population;  that  the  rest  are  free 


18  Business  Economics 

to  do  otlier  things  must  certainly  be  counted  a  gain, 
though  the  conditions  under  which  work  in  the  factory 
and  life  in  the  city  are  carried  on  at  present  leave  much 
to  be  desired. 

Impoktance  of  Agkicultuke 

Writing  about  1865,  an  eminent  English  traveler,  Sir 
S.  Morton  Peto,  apologized  for  calling  the  United  States 
an  agricultural  country;  today  he  would  be  spared  this 
worry,  for  the  census  of  1910  gave  the  net  value  of  prod- 
ucts of  the  farm  as  $5,487,161,000  and  of  pure  manufac- 
tures as  $8,530,261,000.  Indeed  since  1890  the  value  of 
the  manufactures  of  the  country  has  been  larger  than  of 
the  farm  products,  and  the  United  States  now  ranks  as 
one  of  the  leading  manufacturing  nations  of  the  world. 
That  we  are  continuing  to  grow  relatively  faster  as  a 
manufacturing  nation  is  sho^^^l  by  the  fact  that  the  total 
value  of  our  manufacturing  products  increased  81.2  per 
cent  from  1900  to  1910,  while  the  value  of  agricultural 
products  increased  only  68.6  per  cent.  Nevertheless  the 
value  and  amount  of  the  agricultural  products  are  stu- 
pendous; the  United  States  leads  all  countries  in  the 
production  of  dairy  products,  corn,  and  wheat,  and  the 
greater  part  of  the  lumber,  meats,  tobacco,  and  cotton 
w^hich  enter  into  the  world's  trade  come  from  her  forests 
and  fields. 

Agricultural  Products 

While  the  territory  of  the  United  States  is  well  adapted 
by  nature  to  the  cultivation  of  a  great  variety  of  agricul- 
tural products,  as  a  matter  of  fact  four  main  branches 
furnish  the  bulk  of  the  value  of  our  total  agricultural 
products.  These  are  the  raising  of  live  stock  and  the  pro- 
duction of  hay  and  grain,  cotton,  and  dairy  produce.  The 


Agricultural  Resources  19 

regional  distribution  of  these  products  is  fairly  well 
marked.  Over  half  of  the  live  stock  and  of  the  hay  and 
grain  farms  are  situated  in  the  North  Central  States; 
nearly  half  of  the  dairy  farms  are  located  in  the  North 
Atlantic  division ;  practically  all  the  cotton  is  confined  to 
the  southern  zone.  The  same  may  also  be  said  of  tobacco 
and  sugar.  The  semi-arid  region  of  the  West  is  given 
over  almost  exclusively  to  stock-raising.  Illinois  and 
Iowa  lead  as  agricultural  states. 

Extensive  and  Intensive  Farming 

The  character  of  agriculture  in  the  United  States,  as 
in  all  new  countries,  has  hitherto  been  extensive,  that  is, 
a  small  amount  of  labor  and  capital  has  been  applied  to 
a  relatively  large  amount  of  land,  and  only  the  cream  of 
the  soil  has  been  skimmed  off,  as  it  were.  Where  labor  is 
dear  and  land  is  cheap  this  is  the  most  economical  method 
for  the  farmer;  and  although  European  critics  have  se- 
verely censured  our  system  of  "earth  butchery,"  where- 
by the  fertility  of  the  soil  has  been  exhausted  by  constant 
cropping,  vdth  no  effort  to  restore  the  exhausted  proper- 
ties by  fertilizing,  the  practice  was  justified  in  colonial 
days  by  the  conditions  which  produced  it.  Now  how- 
ever the  practical  exhaustion  of  the  free  public  domain 
has  had  the  effect  of  raising  the  price  of  lands  in  the  Mid- 
dle West,  and  this  in  turn  wdll  cause  a  more  careful  and 
intensive  system  of  cultivation.  In  other  words,  as  our 
social  and  industrial  conditions  approach  more  closely 
those  of  Europe,  we  may  expect  our  agricultural  methods 
to  do  so  also.  One  of  the  most  serious  practical  prob- 
lems now  confronting  the  American  farmer  is  the  change 
from  the  old,  wasteful,  extensive  methods  to  the  new, 
careful,  intensive  methods  of  farming.  Those  who  can- 
not make  the  change  will  complain  of  the  unprofitable- 


20  Business  Economics 

ness  of  agriculture,  but  to  those  who  successfully  meet 
the  new  conditions  the  future  offers  much  greater  rewards 
than  even  the  era  of  free  land  could  produce. 

Ageiculture  as  a  Science 

It  has  been  said  that  the  year  1887  marked  the  begin- 
ning of  a  new  stage  of  development  in  American  agricul- 
ture, namely,  that  of  reorganization,  because  in  that  year 
Congress  passed  the  Experiment  Station  Act.  This 
caused  the  application  of  the  principles  of  experimental 
science  to  agriculture  on  a  more  comprehensive  and  sys- 
tematic scale  than  had  ever  been  attempted  before.  Stim- 
ulated by  the  increased  activity  of  the  government  ex- 
periment stations,  the  agricultural  colleges  have  ex- 
panded their  work.  They  are  offering  practical  courses 
to  the  farmers,  and  in  co-operation  with  the  railroads 
some  of  them  are  sending  out  special  lecturers,  with  mov- 
ing laboratories,  to  bring  the  teachings  of  science  as  close 
home  to  the  producers  as  possible.  Finally,  the  won- 
derful work  being  done  by  Burbank  and  others  in  select- 
ing and  crossing,  by  travelers  for  the  federal  Agricul- 
tural Department  in  securing  from  all  over  the  world 
plants  suited  to  our  varied  climatic  conditions,  and  by  the 
experiment  stations  and  agricultural  colleges  in  spread- 
ing the  new  knowledge  among  the  farmers  and  putting  it 
into  actual  practice — all  these  departures  promise  to 
revolutionize  agriculture  and  to  make  it,  as  one  writ-er 
has  said,  a  learned  profession. 

Ceeeals 

The  production  of  cereals  is  the  most  important  branch 
of  agriculture,  comprising  corn,  wheat,  oats,  barley,  rye, 
buckwheat,  and  rice.  Since  the  building  of  the  trunk  rail- 
roads, by  which  the  western  territory  was  given  access  to 


Agricultural  Resources  21 

a  market,  the  progress  of  cereal  production  has  been  ex- 
tremely rapid,  nor  does  there  seem  to  be  any  observable 
slackening.  With  the  introduction  of  improved  varieties 
of  spring  wheat,  cereal  production  is  being  pushed  far- 
ther up  into  Canada  and  our  own  Northwest.  The 
center  of  cereal  production  has  moved  steadily  westward, 
from  eastern  Indiana  in  1860  to  eastern  Iowa  in  1910. 
With  the  practical  exhaustion  of  unoccupied  land  suitable 
for  grain-raising  in  the  United  States,  it  is  clear  that  the 
future  extension  of  the  industry  depends  rather  upon  im- 
provements in  the  methods  of  agriculture  than  upon  the 
addition  of  new  lands.  The  very  practical  problem  here 
presented  to  the  American  farmer  if  he  wishes  to  main- 
tain his  supremacy  in  the  world's  markets  is  being  nobly 
and  successfully  met  by  the  agricultural  experiment  sta- 
tions. For  example,  they  are  teaching  the  farmer  how  to 
increase  his  yield  of  wheat  by  scientific  seed  selection 
and  by  more  careful  methods  of  tillage,  from  an  average 
of  15.4  bushels  per  acre  for  the  whole  country  in  1910  to 
treble  that  amount,  as  is  actually  produced  in  France. 

Of  the  separate  crops  corn  is  by  far  the  most  impor- 
tant, representing  60  per  cent  of  the  total  value  of  all 
cereals  produced  in  1910.  Most  of  the  corn  is  fed  to  stock 
throughout  the  so-called  ' '  corn  belt ' '  and  comes  to  market 
in  the  form  of  pork  and  beef.  Although  corn  is  very 
nutritious  and  is  a  favorite  article  of  diet  in  this  country 
in  various  forms,  astonishingly  little  of  it  is  exported. 
The  development  of  a  foreign  market  still  awaits  the  en- 
terprise of  the  American  farmer  and  food  manufacturer. 

Live  Stock 

The  production  of  live  stock  is  essentially  a  frontier 
industry,  and  while  it  will  probably  always  be  carried  on 
in  the  semi-arid  grazing  districts  of  the  West,  which  can 


22 


Business  Economics 


Agricultural  Resources  23 

be  reclaimed  for  agriculture  only  at  considerable  ex- 
pense, it  already  shows  a  relative  decline.  Owing  to  the 
great  growth  of  the  population,  the  domestic  demand  now 
consumes  almost  all  the  meat  produced  and  the  exports 
are  declining.  This  is  one  of  the  reasons  for  the  recent 
rise  in  the  price  of  meat.    The  industry  is  extensive. 

Quite  the  opposite  is  true  of  the  dairy  industry,  wliicli 
is  intensive,  being  carried  on  for  the  most  part  in  the 
vicinity  of  large  cities  where  land  is  expensive.  The 
changing  character  of  agriculture  and  the  fact  that  it  is 
itself  a  business  enterprise  which  demands  a  knowledge 
of  market  conditions  and  business  methods  are  well 
illustrated  by  the  nature  of  the  dairy  industry.  Dairies 
are  inspected  and  must  conform  to  certain  standards ;  the 
milk  must  be  sterilized  and  shipped,  often  by  special 
trains,  to  the  cities.  Over  a  third  of  the  butter  and  prac- 
tically all  of  the  cheese  is  now  made  in  factories  instead 
of  on  the  farm ;  so  it  is  a  question  whether  the  latter  at 
least  should  not  be  classified  as  a  product  of  manufacture 
rather  than  of  agriculture. 

Cotton 

Of  the  last  of  the  four  important  branches  of  agricul- 
ture, namely,  cotton-raising,  there  is  not  so  much  to  be 
said.  Owing  to  the  intensive  nature  of  its  cultivation, 
machinery  has  never  been  applied  on  a  large  scale  to  its 
production,  as  was  done  in  the  case  of  hay  and  grain. 
The  wasteful  methods  that  prevailed  in  the  South  before 
the  Civil  War  have  been  largely  corrected,  and  the  tend- 
ency to  sterility  of  the  soil  has  been  met  by  the  increased 
use  of  fertilizers  and  scientific  rotation  of  crops.  The 
statistics  of  cotton  crops  for  the  past  thirty  years  do  not 
indicate  any  decrease  in  productiveness  and  show  that 
the  point  of  diminishing  returns  has  not  yet  been  reached. 


24  Business  Economics 

A  peculiar  and  interesting  feature  about  cotton  pro- 
duction is  that  it  is  largely  in  the  hands  of  tenants.  The 
old  slave  plantations  of  the  South  have  been  broken  up 
into  small  holdings  and  many  of  these  are  operated  by 
tenants,  negroes  and  whites,  who  are  too  poor  or  too  im- 
provident to  buy  the  land  outright.  The  main  problems 
connected  with  cotton  culture  are  labor  problems;  and 
the  question  has  often  been  anxiously  asked  whether  the 
free  negro  will  produce  as  much  as  the  former  slave. 
This  can  now  be  confidently  answered  in  the  affirmative, 
although  it  yet  remains  to  be  seen  whether  he  can  be 
made  as  efficient  a  producer  as  his  white  competitor. 
Upon  the  answer  to  that  question  depends  not  merely  the 
future  of  cotton  production,  but  the  economic  salvation 
of  the  negro  himself.  The  constantly  expanding  use  of 
cotton  goods  assures  a  brilliant  future  to  the  cotton-grow- 
ing states  of  the  South,  for  not  merely  is  there  an  assured 
market  in  America  and  Europe,  but  the  primitive  peoples 
of  Asia  and  Africa  may  be  depended  upon  to  absorb  in- 
creasing quantities  of  cotton  fabrics. 

Forests 

Hand  in  hand  with  the  heedless  extensive  methods  of 
agriculture  in  the  past  went  wasteful  use  and  even  de- 
struction of  our  forest  resources.  The  annual  cut  of  lum- 
ber in  the  United  States  is  today  about  forty  billion  feet 
board  measure;  at  this  rate  of  consumption  it  is  esti- 
mated that  the  present  available  supply  will  last  only 
from  35  to  50  years.  It  will  doubtless  surprise  most 
readers  to  learn  that  about  three-fourths  of  the  annual 
wood  cut  is  consumed  as  fuel,  probably  half  of  our  popu- 
lation still  depending  upon  wood  instead  of  coal  for  fuel. 
The  rapid  exhaustion  of  our  forest  supplies,  with  the 
attendant  effects  upon  moisture,  floods,  etc.,  has  brought 


Agricultural  Resources  25 

the  question  of  forest  preservation  to  the  front  as  a  prac- 
tical economic  problem.  We  have  been  squandering  the 
heritage  of  our  children  and  efforts  are  now  being  made 
to  repair  some  of  the  loss  before  we  are  declared  bank- 
rupt. In  1898  the  federal  government  began  practical 
work  in  the  introduction  of  forestry;  this  received  a 
great  stimulus  in  1905  when  the  care  of  the  national  for- 
est reserves,  embracing  over  60,000,000  acres,  was  put 
under  the  control  of  the  Forest  Service.  The  work  has 
been  slowly  growing,  until  in  1915  nearly  4,000  men  were 
employed  in  the  Federal  Forest  Service.  Over  2,000  men 
are  employed  for  the  protective  work  over  the  National 
Forest  Reserves  and  state  and  private  timber  lands. 
This  gives  about  one  man  for  every  80,000  acres  as 
against  one  for  every  1,700  acres  in  Prussia. 

Several  states  have  taken  up  the  movement  for  the  con- 
servation of  forests.  New  York  has  a  forest  reserve  of 
nearly  2,000,000  acres,  in  which  it  supervises  the  cutting 
of  timber  and  attends  to  reforestation  on  the  cut-over 
areas.  Pennsylvania  has  a  similar  reserve  of  nearly 
1,000,000  acres,  and  other  states  are  following  their  ex- 
ample. That  it  is  high  time  to  devote  attention  to  the 
better  conservation  of  this  natural  resource  is  made  evi- 
dent by  the  high  and  increasing  price  of  lumber,  its  grow- 
ing scarcity,  and  deterioration  in  quality. 

Fisheries 

There  is  one  other  natural  resource  the  conditions  of 
whose  supply  resemble  those  of  forestry  and  of  agricul- 
ture in  general ;  this  is  the  fisheries. 

As  in  the  case  of  the  other  two  industries,  so  with  the 
fisheries,  we  have  been  using  up  our  capital  and  declar- 
ing enormous  dividends  at  the  expense  of  the  future. 
The  value  of  the  annual  catch  of  fish  in  the  United  States, 


26  Business  Economics 

including  Alaska,  is  close  to  $70,000,000,  and  is  probably 
exceeded  only  by  the  fishing  industry  of  Japan,  with 
Great  Britain  as  a  close  third.  The  problem  of  the  better 
conservation  of  this  resource  has  been  taken  in  hand  by 
the  federal  government,  through  the  Fish  Commission, 
and  much  has  been  done  to  repair  our  early  prodigality 
by  restocking  lakes  and  streams  with  fish.  More  strin- 
gent fish  and  game  laws  have  also  been  passed  by  most 
of  the  states,  designed  to  prevent  the  extermination  of 
the  supply. 

With  careful  use,  providing  for  depreciation  and  re- 
storing the  elements  destroyed,  all  of  these  should  prove 
inexhaustible  and  should  continue  to  furnish  man  with 
food  and  lumber  for  all  time. 

Natueal  Resources  and  Economic  Laws 

After  this  brief  survey  of  the  natural  resources  of  the 
United  States,  it  is  proper  to  make  some  practical  deduc- 
tions as  to  the  tendencies  of  progress  in  this  line.  Econ- 
omists often  use  the  terms  ** increasing  returns"  and 
'' diminishing  returns."  These  words  explain  certain 
principles  which  are  very  applicable  to  agricultural  pro- 
duction. 

Law  of  Inceeasing  Retuens 

The  law  of  increasing  returns  simply  means  that  cer- 
tain industries  will  yield  a  proportionately  larger  in- 
crease for  any  additional  time,  labor,  or  thought  that  may 
be  expended  in  the  productive  processes.  It  is  a  well- 
known  fact  in  farming  that  the  extra  cost  involved  in 
plowing  deeper,  harrowing  finer  and  at  the  proper  sea- 
sons, and  selecting  the  best  seed  will  often  give  a  very 
much  greater  relative  return.  This  fact  usually  accounts 
for  the  difference  between  a  thrifty  and  a  poor  farmer. 


Agricultural  Resources  27 

The  law  of  increasing  returns  gives  the  scientific  farmer 
his  great  advantage  over  the  indifferent  farmer.  It  not 
only  compensates  for  extra  work  which  is  applied,  but 
gives  something  over  and  above  this  return,  a  sort  of 
differential  gain.  The  same  land  that  yields  $15  worth 
of  wheat  per  acre  if  $5  worth  of  labor  is  applied,  may 
yield  $25  worth  of  wheat  when  $8  worth  of  labor  is  ap- 
plied. In  the  first  case  the  net  yield  would  be  $10  per 
acre  and  in  the  second  case  it  would  be  $17  per  acre. 
The  difference  is  produced  by  the  operation  of  the  law 
of  increasing  returns.  The  extra  $3  applied  in  labor  is 
paid  for  and  in  addition  to  this  sum  there  is  $7  extra  for 
clear  profit. 

Law  of  Diminishing  E-eturns 

A  point  is  reached,  however,  in  most  production  when 
the  application  of  an  additional  amount  of  labor  will  not 
yield  a  proportionately  large  increase.  In  the  example 
just  given,  it  is  likely  that  if  $10  worth  of  labor  were 
applied  to  the  acre,  the  yield  of  wheat  would  amount  to 
only  $26  and  the  net  return  would  be  only  $16.  The  yield 
would  still  have  been  larger  than  in  the  former  case,  but 
the  net  return  smaller.  When  such  a  point  is  reached, 
the  process  responds  to  the  law  of  diminishing  returns. 
By  continuing  the  process,  the  returns  gradually  become 
less  and  finally  reach  a  point  where  further  application 
of  labor  will  bring  no  additional  returns. 

Land  is  peculiarly  responsive  to  these  two  economic 
principles.  Because  it  responds  to  the  law  of  increasing 
returns,  the  movement  for  scientific  farming  is  meeting 
with  such  generous  response.  On  the  other  hand,  be- 
cause all  land  is  subject  to  the  law  of  diminishing  re- 
turns, there  tends  to  become  a  scarcity  of  land  for  the 
people  of  the  globe.    If  it  were  not  so,  the  people  of  New 


28  Business  Economics 

York  or  London  could  be  self-supporting  upon  a  single 
acre  of  ground  by  simply  applying  more  and  more  labor. 
If  such  were  the  case,  there  could  be  no  problem  of  over- 
population. The  operation  of  these  two  principles  must 
always  be  borne  in  mind  when  the  future  possibilities  of 
our  agricultural  resources,  or  of  any  other  industry  sub- 
ject to  the  laws  of  increasing  and  dhninishing  returns, 
are  beinar  considered. 


'■ts 


TEST  QUESTIONS 

1.  What  has  been  the  policy  of  the  United  States  Government 
in  its  disposition  of  public  lands? 

2.  How  has  the  land  policy  of  the  United  States  assisted  the 
cause  of  education  ? 

3.  Is  there  any  more  valuable  agricultural  land  open  for  entry 
in  the  public  domain  of  the  United  States  ? 

4.  How  can  you  account  for  the  strenuous  efforts  that  have  been 
made  within  recent  years  for  redeeming  large  sections  of  arid 
land  by  means  of  irrigation  ? 

5.  What  is  meant  by  dry-farming? 

6.  How  do  the  farms  of  the  United  States  compare  in  size 
with  those  of  the  European  countries  ?  To  what  is  this  difference 
due? 

7.  What  are  the  main  causes  for  the  movement  of  population 
from  the  farm  to  the  city? 

8.  What  four  branches  of  agriculture  furnish  the  bulk  of  our 
agricultural  products  ? 

9.  What  condition  in  the  live  stock  industrj^  is  contributing  to 
the  high  price  of  meats  ? 

10.  Upon  what  conditions  does  the  future  of  the  cotton  crop 
in  the  South  depend  ? 

11.  What  is  meant  by  the  law  of  increasing  returns  in  agricul- 
tural production  ?    Illustrate.  * 

12.  What  is  meant  by  the  law  of  diminishing  returns? 

13.  How  is  scientific  farming  related  to  these  two  natural  eco- 
nomic laws? 


CHAPTER  III 
the  mineral  resources  of  the  united  states 

Character  of  Natural  Resources 

The  natural  resources  of  any  country  may  be  divided 
into  two  broad  groups,  which  call  for  different  treatment 
and  give  rise  to  very  different  problems.  There  are,  on 
the  one  hand,  resources  which  are  exhaustible  but  which 
can  be  restored  again  and,  on  the  other  hand,  resources 
w^hich,  once  exhausted,  can  never  be  replaced  again  by 
human  agency.  Under  the  first  head  come  the  soil,  the 
forests,  the  fisheries,  and  even  the  water  power,  for  all 
of  these  can  be  made  to  yield  steady  returns  to  man  for 
thousands  of  years,  if  used  intelligently.  Under  the  sec- 
ond head  belong  coal,  petroleum,  natural  gas,  and  all  the 
minerals ;  man  may  discover  substitutes  or  he  may  econ- 
omize in  the  use  of  these  substances,  but  he  can  never 
augment  their  supply. 

In  the  previous  section  we  considered  some  of  the  prob- 
lems that  arise  in  the  use  of  the  soil  in  agriculture,  and 
those  connected  with  our  forests  and  fisheries.  For  the 
most  part  they  had  to  do  with  the  intelligent  use  of  these 
agencies  and  the  restoration  or  repair  of  the  elements 
destroyed.  In  this  section  we  are  met  by  a  very  different 
problem,  namely,  the  conservation  of  a  limited  supply  of 
resources  and  their  most  economical  application  to  the 
needs  of  mankind. 

29 


30  Business  Economics 

Two  Views  of  Conservation 

We  can  distinguish  two  contrasting  answers  to  this 
problem,  one  careless  and  optimistic,  and  the  other  pessi- 
mistic and  fearful  of  the  future.  According  to  the  former 
point  of  view  we  should  not  borrow  trouble  of  the  future ; 
man's  career  has  been  one  of  constant  progress;  when  he 
has  been  confronted  with  a  "difficulty  he  has  invariably 
met  it.  Indeed  necessity  has  been  the  most  prolific 
mother  of  invention.  If  our  coal  supplies  are  exhausted, 
man  will  devise  means  of  utilizing  the  heat  of  the  sun,  the 
force  of  the  tides,  the  motion  of  the  waves,  the  stores  of 
electrical  energy  in  the  air,  all  of  which  will  yield  inex- 
haustible supplies  of  heat  and  energy.  If  our  stores  of 
iron  should  fail,  some  enterprising  inventor  would  surely 
discover  a  practicable  and  commercially  profitable 
method  of  extracting  aluminum  from  clay.  New  sources 
of  raw  materials  will  undoubtedly  be  discovered  before 
the  old  ones  give  out,  and  we  may  confidently  expect  that, 
while  the  material  bases  of  a  high  civilization  may  shift 
somewhat,  they  will  never  crumble  and  fall. 

The  other  school  has  sounded  a  louder  note  of  alarm. 
At  the  present  rate  of  consumption  the  coal  and  iron  de- 
posits of  Europe  and  America  must  soon  be  exhausted. 
The  supplies  of  copper,  lead,  and  other  metals  in  favor- 
able locations  are  also  being  consumed  at  an  alarming 
rate,  and  no  other  known  supplies  are  in  sight.  Within 
the  past  century  scientific  knowledge  and  engineering 
skill  have  combined  to  unlock  the  storehouses  of  the 
geologic  ages,  and  now  like  prodigals  We  are  dissipating 
our  fortunes.  To  treat  these  exhaustible  sources  of  sup- 
ply as  permanent  sources  of  income,  without  regard  for 
the  future,  is  based  upon  unsound  theory  and  must  lead 
to  reckless  practice. 


Mineral  Resources  31 

A  Rational  Policy  of  Conservation 

As  so  often  in  opposing  counsels,  there  is  an  element 
of  truth  in  each  of  these  contrasting  points  of  view. 
However,  the  safer  plan  is  not  to  wait  until  we  have  ex- 
hausted our  natural  resources  before  remedying  the  evil, 
but  to  heed  the  warnings  now. 

This  necessity  has  been  recognized  in  the  activities  of 
our  national  and  state  governments  and  private  organ- 
izations for  conservation.  The  National  Conservation 
Commission,  the  Commission  on  Inland  Waterways,  and 
the  Commission  on  Country  Life,  through  the  facts 
which  they  have  collected  upon  the  rate  of  consumption 
of  the  natural  resources  of  the  United  States  and  the 
recommendations  which  they  have  made,  have  turned  the 
eyes  of  the  country  to  the  duty  which  the  present  genera- 
tion owes  to  the  future  as  a  trustee  of  these  riches.  Meas- 
ures have  been  taken  for  the  better  utilization  and  con- 
servation of  these  resources  through  local,  state,  and 
national  action. 

As  a  result  of  the  national  awakening,  we  may  expect 
to  see  a  more  rational  use  made  of  the  gifts  of  nature  and 
a  better  organization  of  our  national  life.  Heretofore 
the  ideal  of  our  business  men  has  been  to  exploit,  one 
might  almost  say  pillage,  the  stores  of  nature  as  rapidly 
as  possible ;  it  was  a  pioneer  stage  of  industry,  inevitable 
but  wasteful.  From  now  on  the  new  conception  must  be 
the  restoration  of  exhausted  elements,  where  possible,  as 
of  the  soil  and  the  forests,  and  the  careful  use  of  the  non- 
renewable stores  of  wealth  so  that  at  least  we  shall  not 
make  them  engines  of  destruction,  as  in  the  case  of  floods 
and  devastation  occasioned  by  careless  hydraulic  mining 
in  the  West.  Let  us  now  turn  to  a  more  detailed  consid- 
eration of  the  separate  items  in  our  inventory  of  national 
wealth. 


32  Business  Economics 

Coal 

Our  modern  civilization  may  be  said  to  rest  upon  coal, 
for  upon  its  possession  depends  man's  ability  to  utilize 
most  of  the  other  items  of  his  wealth.  Passing  over  its 
utility  as  a  fuel  to  heat  our  houses,  we  may  observe  that 
without  coal  it  would  be  impossible  to  smelt  the  iron 
needed  in  all  our  industries,  to  drive  the  machinery,  to 
run  our  locomotives  or  steamboats,  or  in  a  word  to  carry 
on  the  manifold  activities  of  our  industrial  life.  Accord- 
ing to  the  United  States  Geological  Survey,  there  are 
335,000  square  miles  of  coal-bearing  strata  in  this  coun- 
try, but  the  larger  part  of  the  coal  is  too  impure  to  be 
useful  for  industrial  purposes ;  it  serves  in  many  localities 
however  as  domestic  fuel,  as  in  the  case  of  the  lignite 
deposits  of  the  Northwest.  An  estimate  by  Professor 
Tarr  places  the  coal-producing  area  in  the  United  States 
at  not  over  50,000  square  miles.  At  the  present  rate  of 
consumption — over  75,000,000  tons  of  anthracite  and  over 
375,000,000  tons  of  bituminous  coal  in  1913 — it  has  been 
estimated  that  the  anthracite  coal  deposits  will  last  for 
only  fifty  years  longer,  while  we  have  only  enough  bitu- 
minous coal  for  one  hundred  years. 

The  large  deposits  of  coal  in  England  and  their  early 
development  gave  that  country  a  great  advantage  over 
Europe.  But  as  long  ago  as  1861  Professor  Jevons,  a 
noted  English  economist,  sounded  a  note  of  alarm.  He 
prophesied  that  because  of  the  superior  size  and  charac- 
ter of  the  coal  deposits  of  America,  industrial  supremacy 
must  inevitably  pass  to  this  country.  His  prediction  has 
already  been  verified  in  the  case  of  coal  and  iron  produc- 
tion and  will  probably  soon  prove  true  of  textiles  also. 
The  coal  deposits  of  the  United  States  are  thirty-seven 
times  as  great  as  those  of  England,  but  at  the  present 


Mineral  Resources 


33 


H-vCSl     ].r^^^^  .dip 


/  -         •  rp^^^W    :   ^  /   .  -j        S    ^  ^  0 

/  .  ..•       y  .'  -S^^  ""•    I.  '        •  r   Ell 


34  Business  Economics 

rate  of  mining  are  threatened  with  exhaustion  at  no  dis- 
tant date.  It  has  been  estimated  that  in  China  there  are 
coal  deposits  capable  of  supplying  the  world  with  fuel 
for  another  thousand  years.  But  such  estimates  are,  in 
the  present  state  of  our  knowledge  about  China,  the 
merest  guesses,  and,  if  true,  would  seem  to  point  to  the 
future  industrial  supremacy  of  that  country  in  the 
world's  markets. 

Two-thirds  of  the  coal  mined  in  the  United  States  is 
obtained  from  the  Appalachian  field,  extending  from  New 
York  to  Alabama,  Pennsylvania  being  the  largest  coal- 
producing  state  in  the  Union.  In  the  iron  and  steel  in- 
dustries most  of  the  coal  is  coked,  as  it  is  better  for  blast- 
furnace use  in  this  form,  giving  greater  heat  and  contain- 
ing less  sulphur  or  other  injurious  substances  than  coal. 
Owing  to  the  smaller  bulk  and  cost  of  transporting  ore, 
most  of  the  iron  and  steel  industries  are  situated  in  the 
vicinity  of  the  coal  supply,  as  in  Pennsylvania,  Ohio, 
Illinois,  Alabama,  etc. 

Petroleum 

Petroleum,  or  coal-oil,  is  closely  allied  to  coal  in  its 
origin  and  distribution  and  must  be  classed  with  it  as  a 
most  important  product,  not  only  for  industrial  uses,  but 
also  because  of  the  contributions  it  has  made  to  the  com- 
forts of  living.  In  its  production  the  United  States  ranks 
first,  being  closely  followed  by  Russia;  together  these  two 
countries  furnish  over  90  per  cent  of  the  world's  supply 
of  petroleum.  Enormous  economies  have  been  effected 
in  its  production  and  distribution,  which  latter  is  done  by 
piping  the  crude  oil  underground  to  the  refineries.  For 
illuminating  purposes  it  is  the  cheapest  form  of  artificial 
light ;  as  a  fuel  it  is  supplanting  coal  where  the  latter  is 
dear  or  its  cost  of  carriage  high,  as  on  ocean  steamers. 


Mineral  Resources 


35 


P 


36  Business  Economics 

Finally  the  construction  of  light  and  convenient  gasoline 
motors  lias  given  it  great  importance  as  a  source  of  mo- 
tive power.  Natural  gas  is  closely  related  to  petroleum, 
but  the  supply  has  been  so  reduced  by  rapid  and  reckless 
use  that  it  has  but  a  limited  economic  outlook  and  is  of 
local  significance  only. 

Iron 

Of  all  the  metals  iron  must  be  considered  the  most 
useful  for  man,  far  surpassing  the  so-called  precious 
metals  in  economic  importance.  Its  great  utility  is  so  evi- 
dent that  its  production  and  use  have  often  been  taken 
as  a  criterion  of  the  material  progress  of  a  community. 
Iron  is  the  only  metal  that  can  be  welded  and  is  accord- 
ingly of  great  significance,  whether  in  making  strong 
machinery,  as  the  shafts  of  oc^an  steamships,  or  the 
framework  of  a  twenty-story  building,  or,  in  the  form  of 
steel,  the  most  delicate  surgical  instruments  or  watch 
springs.  Judged  by  the  test  of  iron  ore  production,  the 
United  States  ranks  high,  for  it  turns  out  about  four- 
fifths  of  the  world 's  supply ;  all  of  this  is  used  for  domes- 
tic consumption,  in  its  own  blast  furnaces,  though 
much  of  it  is  afterwards  exported  in  the  form  of  pig  iron 
or  structural  iron  or  steel.  Though  iron  is  universally 
distributed  throughout  creation,  it  must  occur  in  large 
beds  or  deposits  before  it  can  be  profitably  mined. 

The  most  favorable  situation  of  an  iron  ore  for  profitable 
extraction  is  near  good  coking  coal  for  smelting  and  limestone 
for  a  flux,  as  in  the  Birmingham  district  of  Alabama;  and  in 
such  a  situation  even  low-grade  ores  can  be  worked  profitably. 
Unless  this  is  the  case,  iron  ore  cannot  be  extensively  mined 
excepting  under  conditions  of  great  abundance  and  economical 
methods  of  transportation,  as  in  the  Lake  Superior  district, 
where  thick  and  remarkablv  uniform  beds  of  good  ore  occur  in 


Mineral  Resources  37 

such  a  position  that  water  transportation  to  the  market  is  pos- 
sible. Where  these  conditions  do  not  exist,  iron-mining  is  fea- 
sible only  on  a  small  scale  for  the  local  market.  Thus,  in  the 
Rocky  Mountains  there  are  almost  inexhaustible  supplies  of 
iron,  often  of  a  high  grade,  which  are  at  present  of  no  value 
whatsoever.^ 

The  most  wonderful  iron-mining  region  in  the  United 
States  and  probably  in  the  world  lies  in  the  northern  part 
of  Michigan  and  Minnesota,  where  five  ranges  or  lines  of 
hills  contain  immense  deposits.  These  lie  so  near  the  sur- 
face that  they  can  be  dug  out  of  open  pits  at  a  cost  of 
from  10  to  50  cents  a  ton,  against  $1  a  ton  in  a  shaft  or 
underground  mine.  Three-fourths  of  the  iron  ore  pro- 
duced in  the  United  States  is  mined  in  this  district.  Its 
proximity  to  the  lake  ports  makes  possible  its  transpor- 
tation to  the  iron  and  steel  manufacturing  centers  at  very 
low  rates.  Machinery  has  been  applied  on  an  immense 
scale  to  the  work  of  mining,  loading,  and  unloading  the 
ore.  Steam  shovels  scoop  up  the  ore  from  the  open  pit, 
filling  cars  at  the  rate  of  almost  one  a  minute;  the  work 
of  loading  this  into  the  ore  ships  at  the  ports  is  equally 
expeditious,  only  about  two  hours  being  required  to  load 
an  ore  ship  of  6,000  tons,  while  the  work  of  unloading  is 
performed  for  the  most  part  by  an  endless  chain  of  buck- 
ets and  traveling  cranes. 

By  these  means  an  ultra-intensive  exploitation  of  these 
magnificent  deposits  is  taking  place  and  it  is  a  question 
whether  they  will  not  soon  be  exhausted.  "But  the 
Americans,"  writes  Professor  Leroy-Beaulieu,  a 
friendly  but  keen  critic  of  our  industrial  development, 
'*  relying  on  the  constant  good-will  of  nature,  are  confi- 
dent that  they  will  discover  either  new  and  productive 
ranges  in  this  district,  or  rich  deposits  in  other  districts." 

1  Tarr,  Economic  Geology  of  the  United  States,  pp.  7,  119. 

JL      JL     t}     <l)     (^       4 


38  Business  Economics 

Precious  Metals 

The  precious  metals  have  received  more  than  their  fair 
share  of  attention,  for  the  industrial  progress  of  the 
world  is  much  less  dependent  upon  their  presence  in  large 
and  easily  obtained  quantities  than  it  is  upon  the  more 
common  metals.  Nevertheless  they  are  important  be- 
cause of  their  use  in  the  arts  and  in  exchange  as 
money.  In  their  production  the  United  States  stands 
second,  being  surpassed  in  the  output  of  gold  by  the 
Transvaal  in  Africa  and  in  that  of  silver  by  Mexico.  The 
production  of  these  metals  has  always  in  the  world's  his- 
tory proceeded  spasmodically,  and  a  speculative  spirit 
has  usually  been  present.  More  recently,  however,  scien- 
tific geological  knowledge  and  improved  metallurgical 
methods  are  changing  the  industry  of  gold-  and  silver- 
mining  from  a  gambling  venture  to  a  legitimate  industry. 

The  practical  problem  at  present  confronting  Ameri- 
can gold-mining  companies  is  to  reduce  expenses,  some 
of  the  principal  bearings  having  for  some  years  sho^vn 
signs  of  exhaustion,  as  for  instance  in  the  Cripple  Creek 
district  of  Colorado.  There  is  always  a  chance,  however, 
that  new  gold  fields  may  be  discovered  to  make  good  the 
exhaustion  of  the  old.  In  the  case  of  silver,  on  the  other 
hand,  the  metal  is  found  in  such  abundance  that  the  pres- 
ent rate  of  production  seems  almost  indefinitely  assured ; 
a  slight  increase  of  the  price  or  improvements  in  the  art 
of  extracting  the  metal  will  at  any  time  bring  enlarged 
supplies  on  the  market.  Africa,  Australia,  and  the 
United  States  produce  almost  all  the  world's  supply  of 
gold,  Colorado  being  the  leading  state  in  the  last-named 
country.  Mexico  and  the  United  States  together  produce 
over  two-thirds  of  the  world 's  silver,  the  leading  rank  in 
this  countr}^  being  held  by  Nevada. 


Mineral  Resources  39 

Copper 

Among  the  other  metals  copper  is  by  far  the  most  im- 
portant. In  primitive  civilizations,  before  the  art  of 
smelting  iron  had  been  discovered,  copper  was  indis- 
pensable because  it  was  so  easily  malleable;  in  Homeric 
times,  for  instance,  armor,  utensils,  money,  etc.,  were 
made  of  copper  or  alloys  of  copper  (bronze  and  brass). 
After  an  eclipse  of  some  centuries  copper  has  again  risen 
to  the  front  rank  by  reason  of  its  qualities  as  a  conductor 
of  electricity.  The  new  use  of  electricity  to  transmit 
power  and  the  development  of  electrical  industries  have 
greatly  increased  the  demand  for  this  metal  and  have 
caused  a  great  expansion  in  its  production.  Here  again 
the  United  States  holds  first  rank,  contributing  over  half 
of  the  world 's  copper  supply.  As  in  the  case  of  iron,  tlie 
northern  peninsula  of  Michigan  is  the  most  important 
center  of  copper  production,  with  Montana  a  close  sec- 
ond and  Arizona  contributing  most  of  the  remainder. 

Like  petroleum,  copper  production  is  controlled  by  a 
small  number  of  operators,  five  mining  companies  alone 
furnishing  one-half  of  the  American  supply.  Unlike  pe- 
troleum, it  is  far  from  being  monopolized,  for  new  and 
rich  supplies  lie  just  on  the  margin  of  profitable  working 
and  will  always  be  brought  into  the  market  whenever  the 
price  warrants.  One  reason  for  American  pre-eminence, 
aside  from  the  rich  stores  of  the  metal,  lies  in  the  prog- 
ress made  in  the  art  of  refining  it  by  the  electrolytic 
process,  considerable  foreign  ore  being  brought  here  to  be 
treated  by  this  method. 

Nature  has  not  blessed  the  United  States  so  abundantly 
with  the  minor  metals,  lead,  zinc,  and  aluminum,  while 
almost  all  the  tin  used  here  has  to  be  imported. 


40  .  Business  Economics 

OuE  Debt  to  Nature 

It  is  apparent  from  even  this  brief  and  hasty  survey 
of  the  mineral  resources  of  the  United  States,  comprising 
those  extractive  industries  which  once  exhausted  can 
never  be  restored  by  man,  that  this  country  is  wonder- 
fully well  supplied  with  the  material  means  of  civiliza- 
tion. Minerals  and  metals  are  remarkably  abundant  and 
accessible.  The  wonderful  material  progress  of  the 
United  States  during  the  nineteenth  century  is  abun- 
dantly explained  by  this  fact,  though  due  credit  must 
also  be  given  to  the  enterprise,  industry,  and  genius  of 
those  who  developed  these  natural  resources.  The  indus- 
trial supremacy  of  the  American  nation,  founded  on  such 
a  stable  material  basis,  seems  well  assured.  We  of 
this  country  have  been  rather  inclined  to  boast  of  our 
industrial  progress  and  our  material  bigness,  whereas  it 
must  now  be  apparent  that  we  owe  much,  if  not  most,  to 
the  bounty  of  nature.  We  should  therefore  see  to  it,  in 
a  proper  spirit  of  humility  and  thoughtfulness,  that  Ave 
do  not  waste  our  heritage,  but  hand  it  on  as  nearly  undi- 
minished as  possible  to  our  children. 

Water  Power 

There  is  one  other  asset  in  our  national  wealth  which 
has  already  contributed  much  to  our  progress  and  is 
destined  to  play  an  even  more  important  role  in  the  fu- 
ture and  that  is  our  water  power.  In  colonial  days,  be- 
fore the  invention  of  the  steam  engine  and  the  use  of 
coal,  this  was  of  prime  importance  and  determined  the 
location  of  many  a  toAvn,  inasmuch  as  the  best  site  was  at 
the  ''fall  line"  of  the  rivers,  where  water  power  was  ob- 
tainable. With  the  invention  of  the  steam  engine  and 
the  use  of  steam  as  a  motive  power,  industry  became  less 


Mineral  Resources  41 

dependent  upon  water  power  and  moved  away  from  the 
rivers  to  the  vicinity  of  coal  mines.  Now  again  has  come 
another  swing  of  the  pendulum,  and  with  the  rise  of  elec- 
tricity as  a  motive  power  and  the  harnessing  of  our 
streams  and  waterfalls  for  the  creation  of  electrical 
energy,  we  are  beginning  to  value  more  highly  this 
source  of  power.  Here  again  we  find  the  United  States 
wonderfully'  blessed  as  compared  with  other  countries. 
'*It  is  probable,"  says  Shaler,  "that,  measured  in  horse 
power  or  by  manufactured  products,  the  energy  derived 
from  the  streams  of  this  country  is  already  more  valua- 
ble than  those  of  all  other  lands  put  together."  The 
total  amount  of  direct  water  power  used  by  manufactur- 
ing establishments  in  1910  was  1,822,888  horse  power,  or 
about  10  per  cent  of  all  the  power  used. 

Prior  to  1890  the  largest  use  of  water  power  was  in  its 
direct  application  to  machinery  at  the  immediate  point  of 
development.  Since  that  time,  however,  the  use.  of  elec- 
tricity as  an  agency  whereby  the  energy  developed  by 
falling  water  can  be  transformed  and  applied  to  the 
driving  of  machinery  has  entirely  changed  the  conditions 
under  which  the' power  of  our  streams  can  be  utilized. 
The  practical  possibility  of  transmitting  electrical  power 
over  long  distances — for  example,  over  200  miles  from 
the  Sierras  to  San  Francisco — has  removed  the  necessity 
of  building  factories  immediately  adjacent  to  water  pow- 
ers, but  permits  its  utilization  where  most  convenient 
and  often  where  the  lack  of  coal  has  made  the  use  of 
steam  power  impracticable.  The  best-known  example  of 
the  development  and  transmission  of  electrical  energy 
for  industrial  purposes  is  the  case  of  Niagara  Falls,  but 
more  striking  illustrations  may  be  found  on  the  Pacific 
coast  and  in  the  great  Keokuk  dam  across  the  Missis- 
sippi with  a  capacity  of  300,000  horse  power.     The  ex- 


42 


Business  Economics 


Mineral  Resources  43 

istence  of  wonderful  opportunities  on  the  Atlantic  sea- 
board gives  brilliant  promise  for  the  future  of  manufac- 
turing in  this  region. 

So  valuable  indeed  are  these  sources  of  power  now 
seen  to  be  that  there  is  danger  that  their  control  may 
be  monopolized  by  a  few  shrewd  and  far-sighted  indi- 
viduals before  the  general  public  awakes  to  a  realization 
of  their  importance.  It  has  frequently  been  asserted 
that  there  is  a  ''water  power  trust"  already  organized 
for  this  purpose.  The  opportunities  for  wealth-getting 
have  hitherto  been  so  great  in  this  country  and  the  great 
task  of  the  American  people  has  thus  far  been  so  ex- 
clusively the  one  of  developing  its  wonderful  natural 
resources  that  we  have  grown  careless  of  our  com- 
mon rights  and  have  permitted  private  individuals  to 
monopolize  a  number  of  limited  resources  of  this  char- 
acter. One  of  the  great  practical  problems  of  the  future 
is  that  of  securing  the  growing  value  of  these  natural 
monopolies  to  the  whole  nation,  without  at  the  same  time 
retarding  the  energy  and  industrial  development  of  the 
American  people. 

TEST  QUESTIONS 

1.  Into  what  groups  may  the  natural  resources  of  our  country 
be  divided  ?    Illustrate. 

2.  What  two  answers  are  given  to  the  problem  of  conserving 
our  natural  resources? 

3.  What  are  the  characteristics  of  a  rational  policy  of  con- 
servation ? 

4.  Where  are  the  leading  coal  deposits  of  the  country  found  ? 

5.  At  the  present  rate  of  use,  how  long  will  our  known  supply 
of  coal  last? 

6.  What  is  the  most  favorable  situation  for  iron-ore  deposits? 
State  reasons. 

7.  Where  is  the  most  wonderful  iron-mining  region  of  the 
United  States  located  ?    What  makes  it  such  a  remarkable  region  ? 


44  Business  Economics 

8.  "Why  may  it  be  said  that  the  gold-  and  silver-mining  in- 
dustrj^  is  passing  from  a  gambling  venture  to  a  legitimate  in- 
dustry ? 

9.  What  are  the  chief  gold-producing  centers  in  the  United 
States? 

10.  Why  is  copper  so  very  important  in  modern  industry? 

11.  Upon  what  factors  does  activity  in  the  copper-mining  re- 
gions depend? 

12.  To  what  extent  is  water  power  used  in  modern  industry? 


CHAPTER  IV 
capitalistic  production 

Use  of  Capital  in  Production 

Modern  production  is  usually  called  "capitalistic"  be- 
cause it  involves  in  its  processes  the  use  of  a  large 
amount  of  capital.  In  a  primitive  stage  of  culture  man 
appropriated  directly  from  nature's  bounty  the  food  and 
shelter  which  he  required.  But  today  man  has  adopted 
long  and  round-about  methods  of  producing  goods,  in- 
volving numerous  stej3S  between  his  first  efforts  and  the 
turning  out  of  the  finished  articles.  He  invents  tools  and 
machinery  to  assist  him  in  his  work,  and  while  he  multi- 
plies the  processes  of  production  he  also  enormously  in- 
creases the  results. 

Capital  has  become  absolutely  indispensable  in  modern 
production  and  is  yearly  playing  a  more  important  role. 
At  tlie  same  time  various  problems,  born  of  the  new  con- 
ditions, have  arisen,  such  as  the  growth  of  large-scale 
production,  the  elimination  of  the  small  producer  and 
the  independent  artisan,  the  growth  of  trusts,  the  rhyth- 
mic recurrence  of  speculative  periods  and  industrial 
crises,  the  relations  of  labor  and  capital,  and  others  sim- 
ilar in  character. 

The  Nature  of  Capital 

What  is  capital?  This  question  is  very  pertinent  to 
the  topic  of  capitalistic  production.     It  is  easier  to  de- 

45 


46  Business  Economics 

scribe  the  main  features  of  a  capitalistic  society  than  to 
explain  the  nature  of  capital  itself.  We  may  omit  the 
fine  distinctions  that  are  made  by  the  economist  and 
describe  capital  in  a  few  simple  words.  Capitalistic  pro- 
duction is  an  indirect  or  a  round-about  system  of  produc- 
tion. Labor  is  first  applied  to  the  making  of  tools  and 
machinery,  and  these  in  turn  are  used  for  further  produc- 
tion. All  production  is  for  the  ultimate  purpose  of  satis- 
fying human  wants.  But  if,  since  the  beginning  of  time, 
men  had  produced  only  for  immediate  consumption,  we 
should  still  be  making  our  living  as  the  gorilla  or  chim- 
panzee. "\^^len  man  first  used  some  of  his  spare  time  to 
chip  an  axe  or  an  arrow  head,  he  began  to  create  capital. 
Capital  is  therefore  in  the  nature  of  a  surplus — some- 
thing which  is  taken  out  of  production  not  for  immediate 
consumption,  but  to  be  used  in  aiding  further  production. 
This  explanation  of  capital  makes  it  clear  that  it  can 
be  increased  only  by  increased  savings  and  by  temporary 
sacrifices.  The  building  of  the  Panama  Canal  illustrates 
this  process  as  clearly  in  modern  industrial  life  as  the 
illustration  of  the  arrow  head  in  primitive  life.  The 
people  of  the  United  States  have  denied  themselves  the 
immediate  enjoyment  of  approximately  $500,000,000  in 
order  that  this  great  instrument  to  commerce  and  indus- 
try might  be  constructed  for  future  use.  From  this  con- 
ception of  capital,  it  is  evident  that  it  consists  only  of  the 
concrete  instruments  made  by  man.  It  involves  labor 
and  saving.  Land  and  similar  elements  given  by  nature 
are  excluded  by  the  definition.  If  we  are  to  develop  our 
capitalistic  system  of  production,  we  must  produce  two 
classes  of  wealth :  one  for  immediate  consumption  to  sup- 
ply the  necessities  of  life  and  another  for  future  produc- 
tion. Of  the  three  factors  in  production  usually  men- 
tioned, namely,  land,  labor,  and  capital,  man  has  it  in  his 


Capitalistic  Production 


47 


power  to  increase  the  third  factor,  capital,  in  proportion 
as  he  is  willing  to  save  out  of  present  production. 

Progress  in  Capitalistic  Production 

The  most  striking  phenomenon  of  the  nineteenth  cen- 
tury was  the  great  industrial  progress  of  the  more  devel- 
oped nations.  This  is  best  shown  in  the  following  table, 
taken  from  Mulhall's  Industries  and  Wealth  of  Nations: 

Growth  op  Manufactures  in  the  Nineteenth  Century 


Millions  of  Dollars 

Countries 

1820 

1840 

1860 

1894 

United  Kingdom    

Trance    

1,411 

1,168 

900 

511 

1,654 

1,883 
1,606 
1,484 
852 
2,516 

2,808 
2,092 
1,995 
1,129 
3,455 

4,263 
2,900 

Germjuiy    

3,357 

Austria 

1,596 
5,236 

Other  states    

Europe    

5,644 

268 

8,341 
467 

11,479 

1,907 

17,352 

United  States 

9,498 

Total 

5,912 

8,808 

13,386 

26,850 

Extraordinary  as  has  been  this  universal  growth,  the 
development  of  manufactures  in  the  United  States  has 
been  still  more  marvelous,  both  absolutely  and  in  relation 
to  other  branches  of  industry.  Between  1850  and  1910 
both  the  population  and  the  products  of  agriculture  quad- 
rupled, but  the  value  of  manufactured  products  increased 
twenty  fold  and  that  of  capital  invested  in  manufac- 
tures thirty  fold.  The  United  States,  though  politically 
younger  than  the  countries  of  Europe,  is  industrially  one 


48  Business  Economics 

of  the  most  advanced.  The  application  of  labor-saving 
machinery  and  of  improved  and  economical  methods  of 
production  and  distribution  has  probably  proceeded  fur- 
ther here  than  in  any  other  land.  Nowhere  can  we  study 
to  better  advantage,  therefore,  than  in  America  the  prob- 
lems that  have  grown  out  of  this  advanced  capitalism. 

Causes  of  Industrial  Progress 

The  causes  of  this  rapid  industrial  development  are 
enumerated  by  the  census  report  as  five  in  number:  (1) 
the  agricultural  resources  of  the  country,  (2)  the  mineral 
resources,  (3)  the  highly  developed  transportation  facili- 
ties, (4)  the  freedom  of  trade  betw^een  states  and  terri- 
tories, and  (5)  the  absence  of  inherited  and  over-con- 
servative ideas. 

We  have  already  considered  the  wonderful  agricul- 
tural and  mineral  resources  of  the  countiy  and  have  seen 
how  greatly  the  American  people  are  indebted  for  their 
industrial  prosperity  to  the  bounty  of  nature.  The  mag- 
nificent system  of  inland  waterways,  comprising  over 
18,000  miles  of  navigable  rivers,  and  the  railroad  system, 
with  over  200,000  miles  of  track,  facilitate  a  rapid  and 
cheap  exchange  of  products.  The  enormous  domestic 
market  afforded  the  American  manufacturer,  larger  in 
consuming  capacity  than  that  of  any  other  country  in  the 
world,  has  permitted  the  economic  production  of  goods 
on  a  large  scale  and  a  consequent  reduction  in  cost. 

Foreigners  have  often  asked  the  question  why,  if  free- 
dom from  tariffs  and  trade  restraints  has  been  a  good 
thing  within  the  United  States,  freedom  of  trade  with 
other  countries  would  not  prove  equally  advantageous. 
In  answer  to  this,  James  G.  Blaine,  formerly  Secretary 
of  State,  wrote:  "It  is  the  enjoyment  of  free  trade  and 
protection  at  the  same  time  which  has  contributed  to  the 


Capitalistic  Production  49 

unexampled  development  and  marvelous  jjrosperity  of 
the  United  States. ' '  Finally  the  absence  of  tradition  and 
of  over-conservative  ideas  handed  down  from  a  former 
and  more  primitive  system  of  industry  has  been  a  great 
boon.  There  have  been  developed  traits  of  energy,  in- 
ventiveness, and  ingenuity,  which,  aided  by  a  universal 
system  of  compulsory  free  education,  have  contributed 
greatly  to  the  material  progress  of  the  people. 

The  Factoey  System 

The  system  under  w^iich  the  production  of  wealth  in  a 
modem  industrial  nation  is  carried  on  is  usually  called 
the  "factory  system,"  and  to  this  we  must  now  turn,  for 
it  is  in  the  factory  that  the  utilization  of  machinery  and 
capital  finds  its  greatest  development.  The  term  is  not 
easily  defined,  but  we  may  adopt  the  description  given  by 
the  late  Carroll  D.  Wright:  *'A  factory  is  an  establish- 
ment where  several  workmen  are  collected  for  the  pur- 
pose of  obtaining  greater  and  cheaper  conveniences  of 
labor  than  they  could  procure  in  their  own  homes,  for 
producing  results  by  their  combined  efforts  which  they 
could  not  accomplish  separately,  and  for  preventing  the 
loss  occasioned  by  carrying  articles  from  place  to  place 
during  the  several  necessary  processes  to  complete  their 
manufacture."  The  essential  elements  in  such  a  system 
are  the  minute  division  of  labor,  the  large  use  of  labor- 
saving  machinery,  the  increasing  specialization  and  local- 
ization of  industry,  and  tlie  concentration  of  production 
in  fewer  and  larger  establishments  with  consequent  in- 
crease of  product  and  reduction  of  cost. 

Division  of  Labor 

The  division  of  labor  may  mean  either  the  separation 
of  occupations  or  the  division  of  a  process  into  minute 


50  Business  Economics 

parts.  An  illustration  of  separation  of  occupations  may 
be  found  in  the  manufacture  of  a  carriage.  One  factory 
produces  the  hubs,  another  produces  the  wheels,  a  third 
produces  the  axles,  a  fourth  produces  the  body,  a  fifth 
manufactures  the  upholstery,  a  sixth  manufactures  the 
hardware,  and  a  seventh  (the  so-called  carriage  factory) 
assembles  the  parts  and  places  the  completed  product  on 
the  market  in  the  form  of  a  carriage. 

As  an  example  of  an  extreme  division  of  labor,  the 
slaughtering  and  meat-packing  industry  offers  a  classical 
example,  though  in  this  case  the  use  of  complex  machin- 
ery is  not  involved.  Professor  Commons  ^  writes  as  fol- 
lows: 

It  would  be  difficult  to  find  another  industry  where  division 
of  labor  has  been  so  ingeniously  and  microscopically  worked 
out.  The  animal  has  been  surveyed  and  laid  off  like  a  map ; 
and  the  men  have  been  classified  in  over  thirty  specialties  and 
twenty  rates  of  pay,  from  16  cents  to  50  cents  an  hour.  The 
50-cent  man  is  restricted  to  using  the  knife  on  the  most  deUcate 
parts  of  the  hide  (floorman)  or  to  using  the  ax  in  splitting  the 
backbone  (splitter)  and,  wherever  a  less  skilled  man  can  be 
slipped  in  at  18  cents,  I8I/2  cents,  20  cents,  21  cents,  221/2 
cents,  24  cents,  25  cents,  and  so  on,  a  place  is  made  for  him,  and 
an  occupation  mapped  out.  In  working  on  the  hide  alone  there 
are  nine  positions,  at  eight  different  rates  of  pay.  A  20-cent 
man  pulls  off  the  tail,  a  22i/^-cent  man  pounds  off  another  part 
where  the  hide  separates  i-eadily,  and  the  knife  of  the  40-cent 
man  cuts  a  different  texture  and  has  a  different  "feel"  from 
that  of  the  50-cent  man.  Skill  has  become  specialized  to  fit  the 
anatomy. 

The  Classified  Index  to  Occupations,  Thirteenth  Cen- 
sus of  the  United  States  (1910),  shows  how  division  of 

1  Quarterly  Journal  of  Economics,  Vol.  XIX,  p.  3. 


Capitalistic  Production 


51 


labor  exists  in  the  cotton  mills.     It  gives  the  following 
lines  of  work : 


Manufactnrers    and 
proprietors 

Officials 

Managers  and  superin- 
tendents 

Foremen  and  overseers 

Clerks 

Apprentices 

Back  boys 

Bailers 

Banders 

Bcaders 

Beamers 

Bobbin  boys 

Breaker  hands 

Card  clothiers 

Card  fixers 

Card  grinders 

Card  strippers 

Carders 

Carpenters 

Chainers 

Cleaners 

Cloth  balers 

Cloth  cutters 

Cloth  menders 

Cloth  steamers 

Combers 

Cotton  shakers 

Creelers 

Designers 

Doffers 


Donblers 

Drawers-in 

Drawers   and   drawing 

frame  tenders 
Dressers 
Drillers 
Dryers 
Dyers 
Engineers 
Filling  carriers 
Finishers 
Folders 

Harness  brushers 
Harness  makers 
Helpers 
Inspectors 
Jack-frame  tenders 
Laborers 
Lappers 
Loom  fixers 
Machinists 
Nappers 
Oilers 
Packers 
Pickers 
Piecers 
Pressmen 
Printers 
QuiUers 
Eeelers 
Bibbers 


Boll  coverers 
Rollers   (cloth) 
Roi)ers 
Rovers 

Roving- frame  tenders 
Scrubbers 
Section  hands 
Sewers   and   seamers 
Shearers 
Sizers 

Slasher  tenders 
Sluliber  tenders 
Sorters 
Spare  hands 
Speeders 
Spinners 
Spoolers 
Spool  fixers 
Stampers 
Starchers 
Sweepers 
Trimmers 
Twisters 
Warpers 
Washers 
Weavers 
Winders 
Wrappers 
Yarn  pourers 
Other  occupations  not 
specified 


Use  of  Machik:eky 

Usually,  however,  when  the  division  of  labor  becomes 
as  minute  as  that  described,  the  routine-like  process  is 
handed  over  to  a  machine.  Indeed  Mr.  John  A.  Hobson 
states  as  a  law  of  machine  industry  the  fact  that  as  soon 


52  Business  Economics 

as  a  process  becomes  perfectly  automatic  and  mechanical 
a  machine  is  invented  which  can  do  the  work  better  and 
more  rapidly  than  human  hands.  Hand  in  hand,  there- 
fore, with  the  subdivision  of  labor  goes  the  extension  of 
labor-saving  machinery.  Labor  becomes  relatively  of 
less  importance  than  capital  in  the  new  methods  of  pro- 
duction, and  man  becomes  a  machine  tender  rather  than 
an  independent  producer. 

There  are  practical  benefits  and  disadvantages  con- 
nected with  this  system.  Many  writers  insist  that  the 
effect  on  the  worker  is  narrowing  in  the  extreme,  but  Pro- 
fessor Marshall  points  out  that  his  labor  as  tender  of  a 
machine  demands  a  higher  order  of  intellectual  develop- 
ment than  that  of  a  handicraftsman,  and  that  he  has  more 
leisure,  while  the  product  of  the  present  system  is  im- 
measurably greater  than  under  the  old  hand  methods. 
The  manufacture  of  products  by  maclnnery  has  in  turn 
required  the  making  of  machines  by  machinery,  as  the 
complex  machines  of  today  could  not  be  turned  out  by 
hand  methods.  A  characteristic  feature  of  the  modern 
factory  system  therefore  has  been  the  growth  of  the  ma- 
chine trades,  which  supply  the  equipment  of  the  new 
industry. 

Localization  of  Industry 

With  the  growing  specialization  of  industry  there  has 
gone  on  an  increasing  localization  in  some  favored  spot 
or  locality.  Thus  most  of  the  collars  and  cuffs  (85  per 
cent)  manufactured  in  the  United  States  are  made  in 
Troy,  N.  Y. ;  64  per  cent  of  the  oyster-canning  is  carried 
on  in  Baltimore;  54  per  cent  of  the  gloves  are  made  in 
Gloversville,  N.  Y. ;  48  per  cent  of  the  coke  in  Connells- 
ville,  Pa. ;  48  per  cent  of  the  brassware  in  Waterbury, 
Conn.;  and  46  per  cent  of  the  carpets  in  Philadelphia. 


Capitalistic  Production  53 

While  there  are  undoubted  advantages  in  such  localiza- 
tion and  specialization  in  a  particular  industrj%  such  as 
reputation,  growth  of  special  skill,  etc.,  there  are  also  off- 
setting disadvantages,  such  as  the  complete  prostration 
of  the  whole  community  if  the  particular  trade  upon 
which  it  depends  is  disastrously  affected  by  trade  de- 
pression or  by  a  shifting  of  the  industry  to  some  other 
locality. 

Production  on  a  Large  Scale 

More  striking  than  the  concentration  of  manufactures 
in  particular  places  has  been  its  concentration  in  a  few 
large  establishments  and  under  the  control  of  fewer  indi- 
viduals. Without  entering  as  yet  into  the  discussion  of 
the  trust  problem,  we  may  at  this  time  take  up  the  earlier 
and  important  tendency  of  industry  to  be  conducted  on 
a  large  scale.  This  concentration  into  a  relatively 
smaller  number  of  establishments  has  been  going  on 
pretty  steadily  since  1850  and  shows  no  signs  of  abate- 
ment at  this  time.  In  the  case  of  the  iron  and  steel  indus- 
tries, cotton  manufactures,  and  leather  goods,  the  move- 
ment is  positively  startling,  an  actual  decrease  in  the 
number  of  establishments  having  occurred  in  the  half 
century.  This  is  most  marked  in  the  monopolized  in- 
dustries. 

At  the  same  time  there  has  gone  on  an  enormous  in- 
crease in  the  size  of  the  individual  plant,  in  the  capital 
employed,  the  number  of  men  employed,  and  the  value  of 
the  product.  Almost  the  only  industries  which  have  not 
yet  displayed  this  tendency  are  those  which  are  essen- 
tially local  in  their  nature,  as  grist  mills,  cheese  and 
butter  factories,  etc.  But  in  general  it  is  characteristic 
of  manufactures  in  the  United  States.  The  same  ten- 
dency has  been  manifest  in  the  countries  of  Europe, 


54 


Business  Economics 


1.  VALOE  OF  MANIiFACTUREO  PfiODUaS  FOB  48  LEADING  CITffiSsJMS 


MfLAOCLPHU 


toOSTON 
MiLWAUKCf 


VORLCANS 
BATONNI 


BfllDOEPOHT 


2.  AVEBAGE  NUMBER  OF  WAGE  EARNERS  FOR  48  LEADING  CITlESi  1909 


^ 

1= 

^ 

?= 

^ 

c: 

5« 

^ 

s« 

rn 

^ 

^ 

=_ 

r^ri 

==p=? 

« 

■ 

■ 

United   States    Census 

Fig.  7. — Charts  Showing  the  Eelative  Importance  of  the  Leading  American 
Cities  as  Manufacturing  Centers 

though  there  a  system  of  well-developed  and  fairly  vigor- 
ous hand  trades  has  resisted  the  movement  and  made 
the  development  in  this  respect  much  less  rapid  than  in 
this  country. 

The  following  tables  explain  more  in  particular  the 
tendency  toward  concentration  since  1850 : 


Capitalistic  Production 


55 


S     2     ;. 

^    t^   _u 

d  S  ? 

(-,    to    00    ■* 

^   t-    i~   p 

o  o  0 
s-  Co 

rf  TtT 

Hi     2 

^*j    ^    j;-  CO 
«    §    g    ^ 

Cl     r^     '^ 


OS   o   o    o 


OS    O    O    l^ 


!0    o    o    ro 


•^    fO~  to"  "^ 


3    rt  ^ 


^    cS    rt    as 


^   <<   <tj   <tj 


bcajco 


t)  '-i  o 

t-  Co 

PL,    2 


«  '^^  Ji 


I.J        Oi         Q 

c^i  ,-H  3 

•e«-  ■«&  " 


C<5     CO     00 

1— ( 


fc-4     ra    .^ 

CU  O  !2i 


56  Business  Economics 

Economies  of  Laege- Scale  Production 

Large-scale  production  is  more  profitable  than  produc- 
tion on  a  small  scale  in  all  industries  which  are  subject 
to  the  law  of  increasing  returns.  By  this,  of  course,  is 
meant  that  the  return  in  product  for  each  additional  dol- 
lar's worth  of  labor  and  capital  employed  grows  greater, 
the  larger  the  scale  on  which  the  enterprise  is  conducted. 
When  this  is  true  the  big  enterprise  will  be  able  to  under- 
sell the  little  enterprises  and  eventually  to  drive  them  out 
of  business.  This  is  true  not  only  in  the  competitive  indus- 
tries, but  also  in  those  which  enjoy  a  legal  or  a  natural 
monopoly,  as  street  railways,  gas  and  water  plants,  etc., 
all  of  which  show  an  irresistible  tendency  to  consolida- 
tion. Before  drawing  any  conclusions  as  to  the  desira- 
bility of  such  a  movement,  let  us  examine  some  of  the 
economies  of  large-scale  production. 

The  most  striking  and  the  most  important  is  the  econ- 
omy in  fixed  capital.  Concentration  is  a  result  of  ma- 
chine production.  As  machinery  becomes  more  expen- 
sive, the  breaking  up  of  the  processes  of  manufacture 
into  small  parts  requires  more  complex  and  detailed  ma- 
chinery; a  larger  outlay  is  requisite  for  an  up-to-date 
plant.  Thus  the  average  amount  of  capital  invested  in 
each  iron  and  steel  establishment  in  the  United  States 
increased  from  $47,000  in  1850  to  $2,282,000  in  1910.  The 
head  of  a  steel  company  in  Pittsburgh  recently  testified 
before  the  Industrial  Commission  that  to  build  and  equip 
a  plant  for  the  manufacture  of  iron  and  steel  under  mod- 
ern conditions  would  call  for  an  investment  of  from  $20,- 
000,000  to  $30,000,000.  It  is  clear  that  under  such  condi- 
tions of  expensive  machine  methods  a  small  plant  would 
have  little  chance  of  existence. 

Steam  railways  afford  another  good  illustration  of  an 
industry  in  which  enormous  economies  are  effected  by  the 


Capitalistic  Production  57 

concentration  of  a  number  of  small,  independent  lines 
under  one  unified  control.  Every  macliine  is  utilized  to 
the  utmost ;  there  is  no  needless  duplication  of  machinery 
such  as  would  occur  if  several  small  plants  divided  up  the 
business,  while  expensive  machines  to  carry  on  relatively 
small  processes  can  be  profitably  installed. 

But  other  economies  than  those  in  the  use  of  capital 
are  present  in  large-scale  production.  A  large  concern 
can  hire  more  expensive  and  better  managers,  can  afford 
to  experiment  with  new  methods,  can  effect  a  more  mi- 
nute and  economical  division  of  labor,  as  for  example  in 
the  slaughtering  business  above  referred  to.  A  striking 
economy  can  also  be  effected  in  the  utilization  of  what 
were  formerly  waste  products,  and  still  are  in  small  con- 
cerns. This  has  been  carried  furthest  in  the  oil-refining 
and  meat-packing  industries ;  a  recent  statement  of  Swift 
&>  Company,  for  instance,  alleged  that  the  dividends  on 
the  stock  were  paid  out  of  the  by-products,  such  as  neats- 
foot  oil,  land  fertilizer,  glue,  fats,  etc.  Owing,  however, 
to  the  generally  wasteful  methods  prevailing  in  the 
United  States,  not  so  much  attention  has  been  given  to 
this  point  as  in  England  and  Germany.  A  final  economy 
which  can  be  secured  by  a  large  business  may  be  men- 
tioned, namely,  carrying  on  allied  or  subsidiary  proc- 
esses. Thus  the  Standard  Oil  Company  builds  its  o^\ti 
pipe  lines,  makes  its  own  barrels,  tin  cans,  pumps,  tanks, 
sulphuric  acid,  etc. 

Widening  of  the  Market 

Such  an  extension  in  the  size  of  the  single  establish- 
ment would  not  of  course  have  been  possible  if  improve- 
ments in  the  arts  of  communication  and  transportation 
had  not  at  the  same  time  immensely  widened  the  market. 
As  long  as  the  market  was  local  and  a  factory  could  af- 


58  Business  Economics 

ford  to  send  its  goods  over  only  a  limited  territory,  there 
was  of  course  a  fixed  limit  to  the  expansion  of  that  indus- 
try. Now,  however,  when  markets  are  often  world-wide 
and  the  demand  for  goods  has  so  enormously  increased, 
when  the  modem  railway  and  steamship  can  transport 
goods  cheaply  and  quickly  half  around  the  globe,  enter- 
prises can  be  expanded  and  conducted  on  a  scale  commen- 
surate with  the  expanded  market  and  improved  methods. 
It  is  clear  then  that  the  tendency  to  production  on  a 
large  scale  is  the  logical  result  of  machine  methods,  that 
it  secures  great  economies,  and  that  in  industries  of  in- 
creasing returns  it  is  absolutely  inevitable. 

Concentration  in  Other  Industries 

But  not  only  in  manufacturing  is  this  movement  ob- 
servable. More  recently  concentration  in  large  establish- 
ments has  revolutionized  the  retail  trade.  Department 
stores  have  supplanted  the  small  shops  because  they  can 
buy  on  better  terms,  get  cheaper  transportation,  offer  a 
greater  variety  to  the  customer  at  a  lower  price,  and  save 
him  time  as  well  as  trouble.  The  growing  ease  of 
communication  with  central  shopping  districts,  the  rapid 
changes  in  fashion  with  the  consequent  large  variety 
which  only  a  large  establishment  could  afford  to  carry — 
all  these  factors  have  helped  the  movement  along.  There 
are  limits  to  such  a  movement,  for  small  tradesmen  will 
always  hold  the  repairing  trades  and  the  sale  of  perish- 
able goods;  thus  there  are  no  businesses  so  scattered  as 
the  small  stores  of  the  butchers  and  the  grocers.  But  on 
the  whole  we  may  safely  conclude  that  the  small  store- 
keeper is  doomed  now  just  as  the  small  manufacturer 
was  two  or  three  decades  ago.  In  the  carrying  trade 
country  carriers  and  a  few  cabmen  in  the  cities  are  the 
only  survivals  of  the  small  independent  business;  the 


Capitalistic  Production  59 

steam  railroad  and  the  electric  railway  have  driven  the 
small  carrier  out  of  business.  In  agriculture  alone, 
where  concentration  is  strictly  limited  by  the  necessity 
for  intensive  cultivation,  and  in  professional  and  per- 
sonal service,  where  the  very  nature  of  the  business  pre- 
vents it,  there  is  little  or  no  development  in  the  direction 
of  large-scale  methods. 

Effects  of  I]srDiJSTEiAL  Concenteation 

Tlie  industrial  and  social  effects  of  this  development 
have  been  marked  in  all  countries.  In  the  United  States 
the  main  attention  has  been  given  to  the  organization  and 
development  of  machinery,  and  a  wonderful  industrial 
advance  has  followed  the  movement.  The  economic  read- 
justments have  consequently  been  made  "\vith  comparative 
ease,  and  the  labor  set  free  by  the  invention  of  new  ma- 
chines has  been  reabsorbed  in  the  same  or  other  indus- 
tries. Consequently  the  social  effects  have  not  been  so 
marked  as  to  call  for  special  emphasis.  As  the  same  ques- 
tion presents  itself,  however,  in  connection  with  the  more 
recent  trust  movement  we  may  profitably  defer  its  dis- 
cussion to  the  next  section. 

Standardization" 

There  is  one  other  characteristic  feature  of  modem 
capitalistic  machine  industry  wliich  deserves  special 
mention,  especially  as  its  development  has  been  carried 
furthest  in  the  United  States.  Reference  is  made  to  the 
system  of  stardardization  and  of  interchangeable  parts. 
In  no  single  feature  is  the  contrast  between  modern  ma- 
chine methods  and  those  of  the  old  hand  trades  greater. 
By  standardization  is  meant  the  production  of  so-called 
''standard  products"  according  to  some  acceptable  size, 
form  or  shape.     In  the  manufacture  of  screws  or  iron 


60  Business  Economics 

beams  or  even  ready-made  clothing,  for  example,  certain 
dimensions  and  sizes  which  are  best  adapted  for  general 
use  are  selected  as  standard  sizes  and  these  are  then 
turned  out  in  large  quantities  by  automatic  machinery. 
The  advantages  of  such  a  system,  in  cheapness,  quickness 
of  delivery,  ability  to  replace  a  single  broken  part,  etc., 
are  numerous  and  manifest. 

The  possibilities  of  standardization  are  strikingly  shown  in 
a  recent  international  incident.  The  Egyptian  Government 
desired  a  bridge  for  the  Atbara  at  the  earliest  possible  moment ; 
inquiry  was  made  of  the  English  bridgeraakers,  but  no  promise 
of  prompt  delivery  could  be  secured.  Within  twenty-seven  days 
after  the  tender  of  the  contract  was  made  to  an  American  firm 
the  bridge  was  ready  for  shipment.  The  feat,  not  a  remarkable 
one,  was  due  to  the  standardization  of  bridge  material.  This 
in  itself  was  a  guarantee  of  quick  delivery  and  construction.^ 

Interchangeable  Paets 

Standardization  was  followed  by  the  system  of  inter- 
changeable parts,  according  to  which  each  part  of  an  in- 
tricate machine  or  product  is  made  exactly  like  the  same 
part  in  every  other  machine.  The  parts  can  thus  be 
turned  out  in  large  quantities  and  assembled  at  a  single 
operation.  From  the  standpoint  of  the  consumer  or  user 
of  the  machines  thus  made,  the  great  merit  of  the  system 
lies  in  the  fact  that  he  can  quickly  and  at  small  expense 
duplicate  any  broken  part.  It  is  today  applied  to  almost 
every  product  of  large  consumption,  from  agricultural 
implements  and  steam  engines  to  watches  and  nails.  By 
producing  machinery  on  this  plan  it  has  been  possible  for 
American  manufacturers  to  extend  their  trade  very  ma- 
terially in  foreign  lands.  The  newspapers  once  reported 
that  Mr.  E.  H.  Harriman  had  expended  $65,000,000  in 

2  McVey,  Modern  Industrialism,  p.  145. 


Capitalistic  Production  61 

standardizing  the  equipment  on  his  railroad  systems; 
while  this  sum  is  enormous,  it  was  undoubtedly  justified 
by  the  increased  economy  in  repairs  and  operation. 

TEST  QUESTIONS 

1.  What  is  really  meant  by  capital  as  used  in  modern  in- 
dustry ? 

2.  How  may  capital  be  increased? 

3.  What  five  causes  does  the  census  report  give  for  the  rapid 
industrial  development  in  the  United  States? 

4.  What  definition  has  Carroll  D,  Wright  given  of  a  factory  ? 

5.  Illustrate  the  two  meanings  which  the  words  "division  of 
labor"  may  indicate. 

6.  How  does  division  of  labor  bring  about  the  introduction 
of  labor-saving  machinery? 

7.  What  are  some  of  the  economies  of  large-scale  production? 

8.  What  are  some  of  the  effects  of  industrial  concentration? 
Illustrate. 

9.  How  does  standardisation  assist  modern  production?    Give 
an  example  of  standardization. 


CHAPTER  V 
trusts  and  monopolies 

The  Combination  Movement 

We  have  already  seen  how  production  upon  a  large 
scale  has  superseded  production  upon  a  small  scale  in 
most  important  branches  of  manufactures.  We  have  now 
to  inquire  whether  production  upon  a  large  scale  is  in 
turn  to  be  supplanted  by  single  consolidated  enterprises, 
by  those  combinations  of  capital  known  as  trusts.  Under 
one  of  these  three  conditions  industry  must  be  carried 
on.  Few  people  wish  to  revert  to  the  stage  when  produc- 
tion was  carried  on  in  small  establishments,  but  warm 
controversy  and  difference  of  opinion  still  exist  as  to 
whether  centralized  management  by  a  single  company  or 
combination  offers  superior  advantages  to  production  by 
independent  competing  establishments.  The  concentra- 
tion of  production  in  a  few  large  establishments  has  been 
followed  by  the  consolidation  of  these  larger  units  into  a 
single  whole. 

Since  the  days  of  Adam  Smith  capital  has  tended  to 
combine  for  the  purpose  of  fixing  prices,  and  these  com- 
binations have  passed  through  several  phases.  The  ear- 
liest form  is  the  agreement  of  independent  concerns  to 
fix  prices,  as  was  done  by  the  American  railroads  in  their 
early  traffic  agreements.  The  next  step  was  to  divide 
the  field,  as  has  been  done  by  the  French  railways  and 
the  American  express  companies.    A  third  phase  of  com- 

62 


Trusts  and  Monopolies  63 

bination  was  the  pool,  which  attempted  to  regulate  the 
output  rather  than  to  fix  the  price  or  divide  the  field. 
Railway,  whisky,  beam  and  other  pools  were  organized 
for  this  purpose,  but  all  broke  down  because  of  the  diffi- 
culty of  enforcing  the  agreement  and  the  temptations  to 
each  member  to  break  it  secretly  for  the  sake  of  the  large 
profits  obtainable.  By  this  time  it  had  become  clear  that 
if  a  real  permanent  consolidation  of  interests  was  to  be 
secured  by  the  competing  enterprises,  some  closer  form 
of  combination  must  be  devised  which  could  not  be  broken 
at  will  by  any  member.  An  industrial  union  and  not  a 
loose  confederation  must  be  attained. 

Accordingly  the  next  step  was  taken  in  1882  by  the 
formation  of  the  Standard  Oil  Trust,  so  called  because 
the  constituent  concerns  handed  over  their  business  to 
the  complete  control  of  a  central  board  of  trustees,  receiv- 
ing in  return  trust  certificates  which  entitled  them  to 
dividends.  Similar  trusts  were  formed  in  the  whisky, 
sugar,  and  other  industries,  but  were  speedily  declared 
illegal  b}^  the  federal  Supreme  Court.  By  this  decision 
the  form  of  combination  was  changed,  but  the  movement 
itself  was  not  at  all  checked. 

The  next  phase  and  the  last  was  the  establishment  of 
holding  corporations,  which  are  organized  to  buy  up  and 
hold  a  majority  of  the  stock  of  a  number  of  individual 
corporations,  whicli  still  retain  their  corporate  existence. 
In  this  way  unity  of  control  is  secured,  to  which  is  added 
a  certain  flexibility;  but  it  is  really  the  trust  under  an- 
other legal  form.  Where  pooling  and  combination  by 
means  of  holding  companies  have  been  forbidden  by  law, 
as  in  the  case  of  railroad  companies,  actual  consolidation 
has  often  taken  place,  though  when  trusts  are  spoken  of 
the  other  form  of  combination  is  more  often  meant.  From 
the  point  of  view  of  business  organization  the  holding 


64  Business  Economics 

company  is  simply  an  extension  of  the  principle  of  the 
corporation,  and  to  a  consideration  of  this  we  must  there- 
fore turn. 

Individual  and  Paktnership  Oeganization 

There  are  three  classes  of  establishments  by  which  in- 
dustry is  carried  on — those  which  are  the  property  of  an 
individual,  those  which  belong  to  partnerships  or  firms  of 
unlimited  liability,  and  those  which  belong  to  corpora- 
tions of  limited  liability.  The  usefulness  of  the  individ- 
ual system  is  of  course  limited  to  small  undertakings, 
where  but  little  capital  and  credit  are  necessary;  this 
form  of  organization  still  dominates  the  field  in  agricul- 
ture, in  the  small  retail  trade,  and  in  the  repairing  indus- 
tries. The  partnership  is  a  joint  undertaking  by  two 
or  more  individuals  and  makes  larger  enterprises  possi- 
ble, but  as  each  individual  is  liable  for  all  obligations  of 
the  firm  or  his  partners  his  personal  liability  is  greatly 
increased.  It  is  well  adapted  to  certain  undertakings, 
such  as  moderate-sized  mercantile  establishments  and 
professional  firms,  owing  to  a  certain  elasticity  in  the 
contractual  relations  of  its  members,  but  it  is  not  suited 
to  large  industrial  ventures,  both  because  of  the  excessive 
personal  liability  and  because  of  the  necessity  of  dissolv- 
ing the  partnership  upon  the  death,  withdrawal,  or  in- 
solvency of  any  member. 

CORPOEATIONS 

The  advantage  of  the  corporation  lies  in  the  fact  that 
it  has  a  continuous  existence,  and  that  the  liability  of  the 
shareholders  is  limited  to  the  amount  of  capital  actually 
contributed  by  each;  it  is  well  adapted  to  modern  enter- 
prise because  it  permits  the  summation  of  large  amounts 
of  capital  from  a  number  of  small  savers  and  centralizes 


Trusts  and  Monopolies  65 

the  use  of  this  capital  in  the  most  economical  manner. 
There  may  thus  be  concentration  of  management  without 
concentration  of  ownership.  The  federal  census  report 
on  manufactures  in  1910  showed  that,  although  only  one- 
fourth  of  the  manufacturing  establishments  were  organ- 
ized as  corporations,  yet  they  produced  79  per  cent  of 
the  total  manufactures  in  money  value.  The  relative 
number  of  corporate  enterprises  showed  an  increase  of 
nearly  100  per  cent  over  that  of  1900.  In  the  field  of 
transportation,  corporations  are  in  almost  exclusive 
control.  Most  banks  and  insurance  companies  are  organ- 
ized under  this  form,  while  mercantile  and  industrial 
undertakings  are  being  more  and  more  generally  organ- 
ized as  corporations.  Not  merely  are  most  of  our  busi- 
ness enterprises  being  conducted  under  corporate  form 
and  organization,  but  most  recently,  as  has  been  already 
pointed  out,  there  has  been  a  movement  to  combine  indi- 
vidual corporations  into  larger  concerns,  or  trusts.  The 
trust  is  usually  thought  of  as  a  monopoly  and,  while  not 
necessarily  so,  it  usually  does  exercise  monopoly  control ; 
but  for  the  present  we  shall  consider  the  trust  problem 
from  the  standpoint  of  business  organization,  deferring 
to  the  end  of  the  section  the  discussion  of  monopoly. 

Trusts 

The  trust  movement  may  be  said  to  have  begun  with 
the  formation  of  the  Standard  Oil  Trust  in  1882,  but 
down  to  1898  its  progress  was  slow.  Beginning  with  the 
revival  of  prosperity  in  1898,  however,  there  ensued  a 
veritable  stampede  of  business  managers  to  enter  into 
combinations.  During  the  next  three  years  149  large 
combinations,  with  a  capital  of  over  $3,000,000,000,  were 
formed.  The  movement  spent  most  of  its  force  by  1902, 
though  it  is  by  no  means  at  an  end  yet.    A  few  figures 


66 


Business  Economics 


from  reliable  authorities  will  make  clear  the  extent  of  the 
movement.  According  to  the  New  York  Journal  of  Com- 
merce, industrial  (that  is,  manufacturing  and  commer- 
cial) and  gas  trusts  were  organized  in  the  United  States 
between  1860  and  1900,  not  including  combinations  in 
banking,  shipping,  railroads,  etc.,  as  shown  in  the  accom- 
panying table : 


Decade 

Number 
Okganized 

Total  Nominal  Capital 

1860-69 
1870-79 
1880-89 
1890-99 

2 

4 

18 

157 

$      13,000,000 

135,000,000 

288,000,000 

3,150,000,000 

Total,  40  years 

181 

$3,586,000,000 

Another  more  recent  list  by  John  Moody  ^  gives  the 
number  of  industrial  trusts  organized  down  to  January 
1,  1904,  as  318;  these  have  acquired  or  control  5,288 
plants  and  have  a  total  nominal  capital  of  $7,246,342,533. 
A  movement  so  general  and  widespread  and  of  such 
gigantic  proportions  must  have  had  some  powerful  and 
intelligible  causes  behind  it.  For  it  was  not  confined  to 
the  United  States,  but  was  equally  observable  in  such 
industrially  diverse  countries  as  England,  France,  Ger- 
many, Russia,  and  other  European  nations. 

Causes  of  the  Teust  Movement 

The  most  important  and  general  cause  was  the  desire 
to  secure  the  legitimate  economies  of  large-scale  produc- 
tion.   A  combined  or  federated  industry  may  secure  even 


1  The  Truth  About  the  Trusts,  p.  469. 


Trusts  and  Monopolies  67 

greater  economies  than  a  single  large  factory.     These 
have  been  concisely  stated  as  follows :  ^ 

The  cost  of  mauagement,  amount  of  stock  carried,  advertising, 
cost  of  selling  the  product,  may  all  be  smaller  per  unit  of 
product.  A  large  aggregation  can  control  credit  better  and 
escape  loss  from  bad  debts.  By  regulating  and  equalizing  the 
output  in  the  different  localities,  it  can  run  more  nearly  full 
time.  Being  acquainted  with  the  entire  situation  it  can  reduce 
the  friction.  A  strong  combination  has  advantages  in  shipment. 
It  can  have  a  clearing-house  for  orders  and  ship  from  the  near- 
est source  of  supply.  The  least  efficient  factories  can  be  first 
closed  when  demand  falls  off.  Factories  can  be  specialized  to 
produce  that  for  which  each  is  best  fitted.  The  magnitude  of 
the  industry  and  its  presence  in  different  localities  strengthens 
its  influence  with  the  railroads.  Its  political  as  well  as  its 
economic  power  is  increased. 

Economies  in  Marketing 

Many  of  these  economies  of  production  are  not  new  to 
these  trusts,  but  have  been  secured  equally  by  large-scale 
manufacturing  establishments.  Some  of  the  sa^dngs, 
especially  in  buying  raw  material  and  marketing  their 
products,  are  peculiar  to  the  trusts  and  mark  a  more  ef- 
ficient mode  of  organization  than  mere  concentration  of 
industry  in  single  large  establishments.  Thus  it  has 
been  found  possible  to  dispense  with  a  great  number  of 
traveling  salesmen,  of  whom  it  was  said  that  30,000  lost 
their  positions  in  the  year  1898  alone.  When  the  whisky 
trust  was  formed  only  twelve  of  the  eighty  distilleries  en- 
tering into  the  combination  were  kept  running,  but  as 
these  were  the  largest,  best  located,  and  best  equipped, 
and  were  run  at  their  full  capacity,  they  were  able  to  turn 
out  as  much  as  all  had  done  before  and  at  an  immense 

2  Fetter,  Principles  of  Economics,  p.  321. 


68  Business  Economics 

economy.  The  saving  of  cross  freights  by  having  an 
order  filled  from  the  plant  most  conveniently  located  is 
considerable;  Mr.  Gates  estimated  the  saving  of  the 
American  Steel  &  Wire  Company  in  this  single  point  at 
$500,000  a  year.  Such  an  economy  could  not  be  secured 
by  a  single  establishment,  no  matter  how  well  organized 
or  on  how  large  a  scale. 

Economies  in  Integration 

The  specialization  of  particular  factories  to  do  special 
processes  is  well  illustrated  by  the  organization  of  the 
United  States  Steel  Corporation.  The  growth  of  this 
combination  is  an  example  not  only  of  consolidation,  but 
of  the  integration  of  industry,  that  is,  the  grouping  to- 
gether under  one  control  of  a  whole  series  of  industries, 
including  the  economical  use  of  by-products.  From  the 
mining  of  the  ore  and  coal,  through  the  processes  of  car- 
rying it  to  the  furnaces,  coking  the  coal  and  making  the 
pig  iron,  manufacturing  the  latter  into  the  finished  forms 
of  iron  and  steel  products,  and  down  to  the  marketing  of 
the  latter,  every  step  is  carried  on  under  the  control  of 
the  United  States  Steel  Corporation.  The  assets  of  the 
company  were  stated  as  follows  soon  after  its  organiza- 
tion, and  they  illustrate  the  magnitude  and  scope  of  its 
operations : 

Iron  and  Bessemer  ore  properties $  700,000,000 

Plants,   mills,   machinery,   etc 300,000,000 

Coal  and  coke  fields 100,000,000 

Eailroads,   ships,   etc 80,000,000 

Blast   furnaces    48,000,000 

Natural  gas  fields 20,000,000 

Limestone    properties    4,000,000 

Cash  and  cash  assets 148,251,000 

Total $1,400^51,000 


Trusts  and  Monopolies  69 

The  Intluence  of  Promoters 

In  addition  to  economies  due  to  improvements  in  meth- 
ods of  organization,  production,  and  marketing,  another 
cause  for  the  sudden  and  vigorous  outburst  of  trust  pro- 
motion in  the  years  1898-1902  may  be  found  in  the  profits 
to  be  secured  by  promoters  and  organizers.  After  the 
successful  launching  of  the  first  few  trusts,  with  their  un- 
doubted economies  and  advantages,  the  movement  was 
taken  in  hand  by  professional  promoters,  who  organized 
combinations,  often  with  the  help  of  underwriters,  in 
every  branch  of  industry  where  there  w^as  any  promise 
of  profit.  That  many  of  these  were  artificial  or  prema- 
ture is  evident  from  the  financial  results.  Of  the  183 
industrial  combinations  enmnerated  by  the  census  in 
1900,  one-third  paid  no  dividends  whatever  after  their 
formation  and  another  one-third  paid  no  dividends  to  the 
holders  of  common  stock. 

As  an  indication  of  the  profits  obtained  by  the  success- 
ful trust  promoter  may  be  cited  the  testimony  given  be- 
fore the  Industrial  Commission  in  the  case  of  the  Tin 
Plate  Trust,  stating  that  this  promoter  realized  from 
$2,000,000  to  $3,000,000  profit  from  the  undertaking. 
When  to  this  is  added  the  profit  obtained  by  the  owners 
of  the  constituent  plants,  which  were  usually  taken  over 
by  the  trust  at  an  exorbitant  valuation,  it  is  clear  that 
the  stimulus  of  financial  gain  was  probably  stronger  in 
many  cases  than  that  of  economy  in  production.  The  bill 
was  of  course  paid  in  most  cases  by  the  investing  public, 
which  absorbed  large  amounts  of  industrials  in  the  years 
of  their  active  promotion. 

Miscellaneous  Causes  of  Trusts 

Other  causes  have  sometimes  been  adduced  to  explain 
the  growth  of  combinations,  such  as  the  tarijff  and  rail- 


70  Business  Economics 

road  freight  discrirQinations,  but  these  are  too  local  in 
their  influence  to  explain  adequately  the  world-wide 
movement  toward  combination.  Trusts  exist  in  free- 
trade  England,  and  in  Germany  where  freight  discrimi- 
nations on  the  state-owmed  railroads  are  practically  un- 
kno^\nti.  It  is,  however,  true  that  in  the  United  States 
both  these  factors  have  been  of  decisive  importance  in 
building  up  certain  powerful  trusts.  The  conservative 
report  of  the  Industrial  Commission  states  as  follows: 

There  can  be  no  doubt  that  in  early  times  special  favors  from 
railroads  were  a  prominent  factor,  probably  the  most  important 
factor,  in  building  up  some  of  the  largest  combinations.  The 
receipt  of  discriminating  favors  from  railroads  has  been  con- 
ceded repeatedly  by  representatives  of  the  combinations  them- 
selves. 

The  Standard  Oil,  beef,  coffee,  steel,  and  other  trusts 
may  be  cited  as  illustrations.  In  the  matter  of  the  tariff 
Mr.  Havemeyer's  statement  that  *'the  mother  of  all 
trusts  is  the  customs  tariff  law"  may  be  set  down  as  the 
rather  peevish  utterance  of  a  disappointed  beneficiary; 
but  there  is  no  doubt  that  combination  has  been  made 
easier  behind  the  tariff  wall,  for  instance,  the  sugar  trust 
itself,  the  leather,  steel,  tin  plate,  and  others. 

Still  other  causes  which  have  aided  the  trust  movement 
are  such  factors  as  patents,  the  widening  of  the  market, 
and  fluctuation  in  industry.  That  patents  have  aided 
the  formation  of  trusts  is  weU  illustrated  in  the  telephone 
business.  All  governmental  privileges  are  apt  to  favor 
the  combination  movement.  Through  the  invention  and 
practical  application  of  improvements  in  transportation, 
refrigeration,  communication,  credit  facilities,  and  so  on, 
not  only  have  opportunities  been  created  for  the  forma- 
tion of  trusts  in  these  lines,  but  the  markets  of  the  world 


Trusts  and  Monopolies 


71 


1.  VALUE  OF  PRODUCTS  FOR  LEADING  INDUSTRIES:  1909  AND  1899 


MCAT  PAMINO 

FOUNDRY  AND  MACHINC<flHO^ 

tUMaSfl 

•TCEL  ROLLINa  MILLS 

rLOUff-MILLS 

MfNTINO  AND  PVBLISHINO 

COTTON  aOOD9 

•LOTHINO,  MEN  1 

BOOTS  ANQ  SH0C9 

WOOLEN  00009 

TOOACCO 

RAILROAD  SHOPS 

BAKERtES 

BLA8T  FWRNACCS 

CLOTHINO.  WOMBN-8 

COPPER  »MCLTINa 

LiguORS,  MALT 

LOATHCT 

SUOAR  AND  WOLAMCt 

BvrreR  and  cheeic 

PAP»R  AND  PULP 

MIT0M0eiLE9 

PHRUTURC 

PETROLEUM,  REFINING 

ILECTRICAL  APPAKATUt 

LIQUORS,  DISTILLED 

K^JT  00008 

Ca*nn,  TIN,  AND  9HeCT-IR0N 

■ILK  OOODS 

LBAO  SMELTING  AND  REFmiNO 

OAB,  ILLUM.ANO  HEATINO 

•ARRIAQES  AND  WAOONS 

OANNINQ  AND  PRESERVING 

MASS  AND  BRONZE 

OIL,  COTTONSEED,  AND  CAKt 

AGRICULTURAL  IMPLEUCNTt 

PATENT  MEDICINEG 

CONFECTIONERY 

RUBBER  GOODS 

FOOD  PREPARATIONS 

PAINT  AND  VARNISH 

CARS,  iTEAMJIAILIOAO 

CHEMICALS 

MARBLE  AND  (TONe 

SOAP 

COFFK  AND  tPieil 

LIATHIR  0000* 

PIRTIUZtRS 


MILLIONS  OF  DOLLARS 

BOO  ISO 

m 


Fig.  8. — These  Tables  Show 
tion 


United   States    Census 
the  Relative  Importance  of  Industries  in  Rela- 
te the  Trust  Movement 


72  Business  Economics 

were  opened  and  invited  selling  on  a  large  scale.  Mar- 
keting often  lends  itself  even  better  to  centralized  control 
than  production.  For  tliis  reason  the  expansion  of 
the  market  must  be  counted  as  one  of  the  factors  in  the 
modern  trust  movement. 

Fluctuations  in  industry  usually  aid  combinations  in 
competitive  businesses  in  two  ways.  In  the  first  place 
they  are  apt  to  force  the  weaker  concerns  to  the  wall, 
while  the  stronger  can  best  survive  the  irregularities  in 
supply  and  demand.  Following  the  adjustment  which 
takes  place  after  every  fluctuation,  the  stronger  busi- 
nesses are  better  able  to  take  advantage  of  new  oppor- 
tunities and  thus  increase  their  economic  position.  In 
the  next  place  fluctuations  in  industry  encourage  trusts 
because  only  by  widespread  co-operation  can  the  amount 
of  production  be  regularly  adapted  to  the  demand,  and 
the  demoralizing  effects  of  over-production  avoided.  In 
this  connection  one  should  remember  that  the  essence  of 
all  monopoly  is  control  over  supply. 

Economic  Effects  of  Tetjsts 

Let  us  now  turn  to  some  of  the  effects  of  industrial 
combinations,  which  we  may  classify  according  as  they 
bear  upon  competitors  and  producers  of  raw  materials, 
labor,  and  consumers.  As  the  number  of  competitors  is 
reduced,  the  fierceness  of  competition  among  those  re- 
maining in  the  field  is  greatly  increased,  for  the  value  of 
the  prize  to  the  successful  enterprise  is  correspondingly 
greater.  It  is  not  surprising  therefore  that  at  times  this 
rivalry  should  have  assumed  unethical  if  not  actually  il- 
legal forms.  The  practice  by  some  trusts  of  fixing  prices 
below  cost  at  some  strategic  point  in  order  to  crush  out  a 
troublesome  competitor,  and  then  correspondingly  rais- 
ing them  elsewhere  so  as  not  to  sustain  any  loss,  is  seri- 


Trusts  and  Monopolies  73 

ous  because  so  subtle.  Professor  John  B.  Clark  regards 
this  as  so  serious  an  evil  that  he  would  have  the  Constitu- 
tion amended  in  order  that  power  might  be  given  the 
federal  government  to  prevent  it. 

The  producers  of  raw  materials,  such  as  cattlemen, 
crude  oil  and  coal  producers,  sugar  and  tobacco  growers, 
and  others,  complain  that  the  prices  at  which  they  sell 
their  products  are  dictated  to  them  by  the  trusts,  which 
are  practically  the  sole  purchasers  of  what  they  have 
produced.  They  claim  that  prices  are  depressed  to  the 
lowest  point  possible  and  that  every  gain  from  increase 
of  demand  goes  into  the  pockets  of  the  trust  managers. 
It  may  of  course  be  answered  that  the  trust  cannot  de- 
press prices  below  the  point  at  which  a  living  profit  can 
be  secured  by  the  producer  of  the  raw  material  or  he 
will  stop  producing;  but  there  is  no  doubt  that  the 
monopoly  power  possessed  by  the  trust  in  such  cases  will 
sometimes  be  used  to  the  disadvantage  of  those  for  whose 
product  it  alone  offers  a  market. 

Trusts  and  Labor 

The  effects  upon  labor  of  the  organization  of  capital 
in  combined  industries  and  under  centralized  control  are 
more  complex.  As  trusts  have  superseded  single  corpo- 
rations because  this  mode  of  industrial  organization  was 
more  economical,  we  must  expect  to  find  that  one  of  the 
economies  was  the  displacement  of  labor.  The  discharge 
of  traveling  salesmen  has  already  been  spoken  of;  with 
the  consolidation  of  various  plants  under  one  control 
other  high-priced  men  were  let  go — managers,  superin- 
tendents, etc.  The  same  thing  was  true  at  the  other  end 
of  the  industrial  scale  and  thousands  of  workmen,  usually 
the  least  efficient  and  capable,  w^ere  deprived  of  work. 
The   natural   consequences   of   these   combinations    and 


74  Business  Economics 

economies  were  not  clearly  apparent  at  the  time,  because 
they  were  happily  coincident  with  a  period  of  business 
expansion  and  prosperity  which  reabsorbed  into  the  in- 
dustrial organism  most  of  the  displaced  workers. 

Another  phase  of  the  relation  between  trusts  and  labor 
is  that  of  their  effect  upon  wages.  In  general  it  may  be 
said  that  there  are  only  two  sources  out  of  which  an  in- 
crease of  wages  can  be  paid,  and  these  are  the  profits  of 
the  business  organizer  and  manager  or  the  increased 
product  of  the  business  itself.  Of  these  two  only  the 
latter  can  serve  as  a  permanent  source  of  higher  wages. 
Now  it  is  pretty  evident  that  labor  has  not  been  in  a 
position  to  force  the  trust  magnates  to  forego  their  prof- 
its. On  the  other  hand,  wages  in  industries  carried  on 
by  industrial  combinations  have  risen,  and  it  must 
therefore  have  been  because  there  was  more  produced 
and  consequently  more  to  be  divided.  If  the  inefficient 
workers  were  discharged  and  only  the  best  ones  retained 
by  the  trusts,  here  is  one  explanation  of  why  they  could 
afford  to  pay  high  wages — they  paid  more  because  they 
got  more  done.  As  yet  labor  has  not  admitted  that  it  is 
unable  to  cope  with  these  industrial  combinations ;  it  has 
demanded,  however,  that  it  be  allowed  to  combine  on  a 
national  scale  and  to  bargain  collectively  with  combined 
capital  on  behalf  of  united  labor. 

Monopoly  Conteol  aistd  Prices 

The  discussion  of  the  effects  of  trusts  upon  the  con- 
sumer leads  at  once  to  the  discussion  of  their  effects  upon 
prices,  for  it  is  through  the  agency  of  price  that  the  trust 
touches  the  ordinary  man.  The  advantages  claimed  by 
trust  organizers  are  economies  of  production  and  lowered 
cost;  but  the  ^dtal  question  to  the  consumer  is  whether 
lowered  cost  increases  profits  or  reduces  prices.    On  this 


Trusts  and  Monopolies  75 

point  the  Industrial  Commission  reaches  the  following 
conclusion : 

In  most  cases  the  combination  has  exerted  an  appreciable 
power  over  prices,  and  in  practically  all  cases  it  has  increased 
the  margin  between  raw  materials  and  finished  products.  Since 
there  is  reason  to  believe  that  the  cost  of  production  over  a 
period  of  years  has  lessened,  the  conclusion  is  inevitable  that 
the  combinations  have  been  able  to  increase  their  profits. 

Moreover  the  power  over  prices  was  greatest  during 
certain  periods  when  the  control  of  the  combinations 
was  greatest.  The  problem  therefore  resolves  itself  into 
the  question:  Are  trusts  monopolies"?  While  a  categori- 
cal answer  cannot  be  given  to  this,  it  may  safely  be  af- 
firmed that  all  trusts  try  to  be  monopolies.  Nor  is  it 
necessary  to  control  absolutely  the  production,  sale,  or 
purchase  of  a  commodity  in  order  to  exercise  monopoly 
power ;  the  control  of  50  or  60  per  cent  may  suffice  to  se- 
cure virtual  monopoly.  The  purpose  of  a  monopoly  is  so 
to  fix  the  price  that  it  will  obtain  the  maximmn  net  profit. 
It  is  conceivable  that  this  result  may  be  attained  by  low- 
ering the  monopoly  price  below  the  point  of  the  competi- 
tive price,  but  this  is  unusual.  In  general  a  monopoly 
price  has  meant  a  high  price,  and  a  high  price  has  meant 
a  restriction  of  the  output.  Where  that  has  been  the  re- 
sult of  trust  control,  society  has  been  injured,  for  not  only 
has  it  not  shared  in  the  economies  of  production,  but  it 
actually  gets  less  and  has  to  pay  more  than  it  would  have 
done  under  competition. 

It  may  be  said,  however,  that  even  in  the  case  of  the 
greatest  monopoly  there  is  always  the  specter  of  poten- 
tial competition  threatening  its  profits,  while  the  possibil- 
ity of  substituting  some  other  commodity  for  the  mo- 
nopolized article  protects  the  consumer  from  too  great 


76  Business  Economics 

extortion  and  keeps  the  price  within  limits.  Absolute 
control  over  price  is  never  exercised  by  any  monopoly. 
Nevertheless,  we  may  fairly  conclude,  in  the  words  of 
Henry  D.  Lloyd,  that  '*  monopoly  is  business  at  the  end 
of  its  journey";  control  over  prices  is  the  object  of 
combination. 

Monopoly  and  Ikdividuax,  Opportunity 

There  remains  to  be  considered  another  charge  of  mo- 
nopoly which  has  been  brought  against  the  trust,  the  mo- 
nopoly of  opportunity  or  the  suppression  of  individual 
initiative.  It  is  no  longer  possible,  it  is  claimed,  for  the 
man  of  small  means,  even  with  good  talents,  to  engage  in 
business  for  himself;  he  must  accept  some  subordinate 
position  in  a  corporation  where  his  individuality  is 
checked  and  his  power  of  initiative  does  not  find  free 
play.  So  far  as  this  is  true  it  would  seem  to  be  the  result 
not  so  much  of  the  trust  movement  as  of  large-scale  pro- 
duction. We  have  seen  that  the  tendency  of  machine  pro- 
duction is  to  enlarge  the  business  unit  and  to  call  for  the 
investment  of  constantly  larger  amounts  of  capital  in  up- 
to-date  establishments.  Some  writers  even,  point  out  that 
the  average  business  man  who  engages  in  business  on  his 
own  account  fails,  and  that  he  should  therefore  be  grate- 
ful if  more  efficient  producers  offer  him  a  remunerative 
and  steady  salaried  position.  Without  insisting  upon 
this  point,  we  may  remark  that  there  are  still  large  fields 
of  enterprise  lying  outside  the  area  of  monopolistic 
control. 

Large-scale  production  is  best  adapted  to  articles  that  can  be 
turned  out  in  large  quantities  according  to  uniform  patterns 
and  standards;  individual  initiative  is  still  free  in  those  lines  of 
production  that  call  for  artistic  ability  or  appeal  to  individual 


Trusts  and  Monopolies  77 

tastes,  or  which,  like  agriculture,  are  dependent  upon  variable 
conditions.^ 

Monopoly  Evils 

There  are,  however,  other  evils  connected  with  trust 
organization  and  management  that  are  more  easily  reme- 
diable and  that  call  for  legislative  regulation.  "The 
evils  of  combination,  remedied  by  regulative  legislation," 
concludes  the  report  of  the  Industrial  Commission,* 
''come  chiefly  from  two  sources:  (1)  the  more  or  less 
complete  exercise  of  the  power  of  monopoly;  (2)  decep- 
tion of  the  public  through  secrecy  or  false  information." 
Various  remedies  have  been  suggested  to  meet  the  first 
class  of  evils,  those  of  monopoly,  generally  in  the  direc- 
tion of  strengthening  the  powers  of  the  federal  govern- 
ment. We  have  however  no  lack  of  legislation  on  this 
subject  already.  Thirty-four  states  and  territories  have 
passed  anti-trust  laws,  and  the  federal  Anti-Tmst  Law 
of  1890  explicitly  provides  that  ''every  contract,  combi- 
nation in  the  form  of  a  trust  or  otherwise,  or  conspiracy 
in  restraint  of  trade  or  commerce  among  the  several 
states,  or  with  foreign  nations,  is  hereby  declared  il- 
legal." The  severe  restrictive  measures  of  the  states 
have  been  largely  nullified  by  the  loose  legislation  of 
three  or  four  "charter-granting"  states,  in  which  95  per 
cent  of  all  the  trusts  have  accordingly  been  chartered, 
while  the  federal  enactments  have  been  found  very  diffi- 
cult to  enforce.  It  is  not  easy  to  define  or  to  prove  mo- 
nopoly or  conspii'acy  in  restraint  of  trade. 

The  second  class  of  evils  has  been  met  by  statutes  re- 
quiring publicity  and  more  definitely  fixing  the  responsi- 
bility of  corporation  officials.    Such  measures  of  control 

8  Bogart,  Economic  History  of  the  United  States,  p.  412. 
4  VoL  XIX,  p.  645. 


78  Business  Economics 

must  be  the  first  step  toward  intelligent  regulation  and 
are  to  be  commended  as  thoroughly  reasonable.  The  es- 
tablishment of  the  federal  Bureau  of  Corporations  with 
power  to  "investigate"  industrial  corporations  engaged 
in  interstate  commerce  has  already  led  to  the  publication 
of  some  valuable  reports.  We  must  first  proceed  along 
the  lines  of  publicity  and  intelligent  information  before 
we  attempt  more  drastic  remedies.  The  monopoly  evils 
of  trusts  will  probably  be  controlled  more  and  more  by 
state  and  national  industrial  commissions  with  powers 
similar  to  those  of  the  Interstate  Commerce  Commission. 
The  federal  Trade  Commission,  organized  in  1915,  has 
been  created  for  this  purpose. 

TEST  QUESTIONS 

1.  Account  for  the  development  of  the  combination  movement 
in  modern  industry. 

2.  Enumerate  the  phases  through  which  combinations  for  the 
purpose  of  fixing  prices  have  passed. 

3.  What  have  been  some  of  the  chief  causes  of  the  trust  move- 
ment? 

4.  How  does  the  combination  movement  bring  about  economies 
in  marketing? 

5.  What  is  meant  by  integration?     What  has  been  its  influ- 
ence upon  the  combination  movement? 

6.  What  are  some  of  the  benefits  to  be  derived  from  the  trust 
movement? 

7.  How  is  the  trust  problem  related  to  the  labor  problem? 

8.  What  are  the  peculiar  dangers  which  result  from  monop- 
oly in  industry? 

9.  How  are  governments  attempting  to  control  the  monopoly 
evil  ? 

10.  What  is  a  holding  company?     How  is  centralized  control 
secured  through  this  device? 


CHAPTER  VI 
speculation  and  crises 

Speculative  Risks  in  Industry 

An  unavoidable  element  of  risk  enters  into  all  modern 
business.  In  the  old  handicraft  stage  of  industry  goods 
were  made  upon  order;  demand  preceded  supply  very 
definitely,  and  there  was  little  possibility  of  mistakes  in 
production.  Nowadays,  as  we  have  seen,  production  is 
for  a  distant  and  often  uncertain  market.  It  is  carried 
on  by  machine  methods  and  roundabout  processes ;  some- 
times the  result  is  a  very  remote  one  and  the  uncertainty 
of  success  is  correspondingly  great.  Production  is  not 
based  upon  order,  but  upon  a  forecast  of  the  possible 
demand,  upon  a  future  market. 

Chance  and  change  are  inseparable  from  productive 
enterprise — natural  chances  from  the  elements,  political 
changes,  such  as  war  or  unfavorable  legislation,  indus- 
trial mistakes,  sickness  or  death  of  oneself  or  others,  and 
economic  changes,  like  the  invention  of  a  new  machine 
or  a  change  in  fashion.  These  are  the  unavoidable  inci- 
dents in  industry  and  are  not  under  the  control  of  the 
individual  business.  Some  of  them,  however,  are  so  regu- 
larly recurrent  that  they  can  be  foretold  on  a  large  scale 
for  any  industrial  society  and  can  be  guarded  against  by 
insurance.  Everyone  recognizes  the  desirability  of  hav- 
ing such  risks  as  those  of  fire,  shipwreck,  lightning,  death, 
etc,  assumed  by  certain  individuals  or  companies  who 

79 


•80  Business  Economics 

make  a  business  of  such  risk-taking.  A  small  premium  is 
paid  by  the  individual  for  protection  against  anxiety  due 
to  fear  of  mischance,  and  he  is  able  to  devote  his  whole 
energies  and  capital  to  his  business;  the  insurance  com- 
pany has  specialized  in  this  one  department  and  by 
equalizing  the  chances  over  a  wide  field  has  practically 
eliminated  them.  In  doing  this  it  performs  a  service  of 
recognized  and  undoubted  social  value. 

Function  of  the  Speculator 

There  is  another  kind  of  risk-taking,  the  social  utility 
of  which  is  not  at  first  sight  so  clear.  Among  the  chances 
of  productive  enterprise  are  those  due  to  the  rise  and  fall 
in  the  prices  of  the  raw  materials,  the  labor,  and  the  fin- 
ished product  between  the  time  when  the  process  of  pro- 
duction is  begun  and  the  time  when  it  is  completed. 
Every  farmer,  every  manufacturer,  every  student  even 
who  invests  capital  in  his  own  education,  is  to  some  ex- 
tent a  speculator.  Along  certain  lines  he  can  protect  him- 
self by  insurance,  but  that  is  not  possible  in  all.  Is  there 
no  way,  then,  by  which  he  can  guard  himself  against  price 
fluctuations  and  assure  himself  of  the  legitimate  gains  of 
his  business?  This,  it  may  be  answered,  is  the  function 
of  the  speculator  in  modern  business,  and  in  performing 
this  service  he  is  benefiting  society  in  much  the  same  way 
as  the  insurance  company  does.  We  must,  however, 
clearly  distinguish  between  legitimate  and  illegitimate 
speculation;  we  are  discussing  only  the  former. 

Services  or  Stock  and  Produce  Exchanges 

One  way  in  which  the  speculative  risk  attaching  to 
price  fluctuations  is  reduced  for  the  manufacturer  and 
assumed  by  the  speculator  is  by  the  establishment  of  a 
continuous  open  market,  like  the  stock  arid  produce-  ex- 


Speculation  and  Crises  81 

changes.  If  a  miller,  for  instance,  engages  to  deliver 
flour  a  year  hence  and  expects  to  begin  milling  in  six 
months,  he  must  know  at  what  price  he  can  buy  his  wheat 
when  he  needs  it,  or  his  anticipated  gain  may  be  turned 
into  a  loss  by  an  unexpected  rise  in  the  price  of  wheat. 
He  is  able,  however,  to  buy  a  future  in  wheat  on  the  pro- 
duce exchange  from  some  broker  who  makes  a  specialty 
of  this  business.  He  buys  his  needed  wheat  now  for  de- 
livery six  months  hence,  and  on  the  basis  of  this  price  is 
able  to  accept  an  order  for  his  flour  a  year  from  now,  al- 
lowing himself  a  fair  profit  as  a  miller  but  wholly  elimi- 
nating the  speculative  risk  of  price  fluctuations.  Or  a 
building  contractor,  before  making  an  estimate  of  the 
cost  of  erecting  a  structure,  will  secure  options  at  definite 
prices  from  dealers  on  the  materials  he  will  require.  So, 
too,  in  the  iron  and  steel  business  it  is  customary  for  man- 
ufacturers to  contract  in  advance  for  materials  at  the 
same  time  that  they  accept  orders  for  the  delivery  of  the 
finished  products. 

In  all  these  cases  the  business  of  dealing  in  futures 
is  assumed  by  a  particular  class  of  people  who  have  de- 
veloped a  special  skill  and  ability  in  forecasting  price 
variations  and  who  can  do  so  very  accurately.  It  is  not  a 
matter  of  luck  or  chance,  but  the  result  of  wide  knowl- 
edge and  careful  study.  ' '  To  foretell  the  price  of  wheat 
one  must  know  the  rainfall  in  India,  the  condition  of  the 
crop  in  Argentina,  must  be  in  touch  as  nearly  as  possible 
with  every  unit  of  supply  that  will  come  into  the  market. ' ' 
Sometimes  the  speculators  make  mistakes,  but  they  are 
certainly  less  apt  to  do  so  than  men  who  are  without 
their  special  talent  and  training. 

Benefits  of  Speculation 

The  social  value  of  this  service  lies  in  the  equalization 
of  demand  and  supply  between  the  present  and  future 


82  Business  Economics 

that  is  thereby  effected.  Let  us  take  as  an  illustration  the 
case  of  the  miller  cited  above.  If  the  price  of  wheat  is 
high  at  the  time  he  accepts  the  order  for  flour,  he  will  be 
inclined  to  charge  a  high  price.  But  the  wheat  broker, 
foreseeing  that  there  is  going  to  be  an  abundant  crop  six 
months  hence,  engages  to  sell  him  his  wheat  for  future 
delivery  at  a  low  price,  and  he  is  thereby  enabled  to  sell 
his  flour  at  a  lower  price.  At  the  same  time  the  price  of 
the  wheat  on  hand  at  the  present  time,  instead  of  being 
held  and  sold  at  famine  prices,  is  consumed  for  present 
needs  at  moderate  prices. 

The  operations  of  the  wheat  brokers  in  such  a  case 
have  a  very  steadying  influence  on  prices,  preventing  the 
oscillation  between  very  high  prices  in  times  of  scarcity 
and  very  low  prices  in  times  of  glut.  It  must  be  admitted 
that;  dealings  in  futures  are  highly  speculative;  ''but  it 
must  be  remembered  that  it  is  not  merely  the  dealings  in 
futures,  but  the  future  itself,  that  is  uncertain.  If  such 
dealings  can  be  confined  to  the  men  most  competent  to 
make  accurate  predictions,  their  tendency  will  clearly  be 
to  lessen  the  uncertainties  of  business."  ^ 

But  closely  connected  ^vith  legitimate  speculation  or 
risk-taking  by  a  specialized  and  trained  class,  there  is,  as 
our  stock  and  produce  exchanges  are  actually  conducted, 
a  large  amount  of  illegitimate  speculation,  and  to  this 
we  may  now  turn  for  a  brief  consideration. 

Illegitimate  Speculation 

The  facilities  offered  by  the  open  markets  on  the  ex- 
changes and  the  practice  of  dealing  in  futures  are  taken 
advantage  of  by  many  who,  without  any  special  training 
or  opportunities  of  knowing  the  market,  simply  bet  on  the 

1  Seager,  Introduction  to  Economics,  p.  176. 


Speculation  and  Crises  83 

price  movements.  Brokers  are  willing  to  buy  and  sell 
produce  or  stocks  for  their  customers  if  the  latter  will 
put  up  with  them  a  margin  of  about  10  per  cent  to  protect 
them  from  loss.  It  is  therefore  possible  for  a  person 
with  little  capital  and  no  knowledge  to  speculate  on  a 
margin,  buying  what  he  does  not  want  and  selling  what 
he  does  not  own.  In  practice  it  is  impossible  to  distin- 
guish between  those  dealings  in  which  actual  delivery  is 
intended  (legitimate  speculation)  and  those  in  which 
no  such  delivery  is  contemplated  (gambling),  and  conse- 
quently most  efforts  to  regulate  transactions  on  the  ex- 
changes have  failed  to  accomplish  their  purpose.  The 
purification  of  their  methods  would  seem  to  lie  with  the 
members  of  such  exchanges  themselves. 

The  contention  has  often  been  made  that  these  fictitious 
transactions  in  such  commodities  as  wheat  or  corn  or 
cotton  create  an  artificial  reduction  in  prices,  since  the 
professional  gambler  usually  sells  short  or  *' bears"  the 
market,  and  that  this  injuriously  affects  the  farmer. 
This  is  manifestly  untenable,  since  every  fictitious  sale 
must  be  balanced  by  a  fictitious  purchase.  What  actually 
takes  place  is  simply  a  bet  between  the  two  parties  to 
such  a  transaction  on  the  actual  course  of  prices  and  of 
itself  does  not  affect  prices,  except  in  the  unusual  case 
of  a  * 'corner."  There  is,  however,  great  possibility  of 
evil  in  the  presence  of  a  crowd  of  uninformed  speculators, 
for  they  can  greatly  increase  the  power  of  an  unscrupu- 
lous operator  who  can  persuade  them  to  follow  his  lead. 
Their  presence,  too,  increases  the  temptation  to  such  a 
man  to  rig  the  market.  Under  present  conditions  the 
abuses  of  speculation  are  more  in  evidence  than  the  eco- 
nomic advantages.  How  to  confine  speculation  to  the 
small  group  of  risk-takers  who  have  special  training  and 
aptitude  for  it,  and  to  prevent  gambling  on  the  stock  and 


84  Business  Economics 

produce  exchanges  is  one  of  the  economic  problems  of 
the  clay. 

Ckises 

One  of  the  most  striking  phenomena  of  modem  indus- 
try is  the  frequent  and  violent  convulsions  of  business 
known  as  "crises."  They  are  characteristic  of  all  com- 
mercially advanced  countries  and  are  generally  most 
marked  in  those  countries  which  are  most  advanced. 
They  are  a  product  of  modern  methods  of  capitalistic 
production  and  are  essentially  a  phenomenon  of  the  nine- 
teenth century.  A  crisis  in  its  last  analysis  is  the  result 
of  a  lack  of  adjustment  between  production  and  consump- 
tion, due  primarily  to  mistakes  in  production.  It  is  sig- 
nificant that  crises  usually  occur  in  periods  of  business 
prosperity,  when  credit  is  easy,  prices  high,  and  employ- 
ment general.  Such  a  period  of  business  prosperity  and 
rising  credit  may  have  been  begun  by  a  series  of  good  har- 
vests. The  demand  for  manufactured  commodities  in- 
creases, prices  rise,  manufacturers  enlarge  their  factories 
or  engage  in  new  enterprises,  wages  and  profits  go  up. 
Many  speculators,  seeing  the  rise  and  thinking  it  will 
continue,  borrow  money  to  buy  goods,  with  the  expecta- 
tion of  selling  again  at  a  profit.  Credit  operations  are 
expanded  to  a  dangerous  extent,  and  when  at  last  a  shock 
to  confidence  occurs  the  house  of  cards  collapses  and  a 
painful  liquidation  and  readjustment  of  industry  ensues. 
The  state  of  trade,  in  the  words  of  Lord  Overstone,  ''re- 
volves apparently  in  an  established  cycle.  First  we  find 
it  in  a  state  of  quiescence — next  improvement,  growing 
confidence,  prosperitj^  excitement,  over-trading,  convul- 
sion, pressure,  stagnation,  distress,  ending  again  in 
quiescence. ' ' 


Speculation  and  Crises  85 

ANALYSIS    OF    A    CRISIS 

The  immediate  occasion  of  a  crisis  is  always  a  shock 
to  credit  or  confidence.  Such  a  shock,  begun  perhaps  by 
the  failure  of  a  bank  or  merchant,  creates  a  demand  for 
ready  money.  No  one  is  sure  that  his  neighbor  will  re- 
main solvent.  Everyone  accordingly  tries  to  secure  him- 
self against  loss  by  enlarging  his  cash  reserve  and  thus 
lessens  the  supply  for  others.  Now  modern  industry  is 
carried  on  by  means  of  credit.  There  is  at  no  one  time 
enough  money  in  the  country  to  meet  all  obligations  ex- 
pressed in  terms  of  money.  Considerably  over  three- 
fourths  of  the  larger  commercial  transactions  in  the 
United  States  are  carried  on  by  means  of  credit.  If 
everyone  tries  at  the  same  time  to  get  actual  cash,  there 
is  simply  not  enough  money  in  the  country  to  go  around. 
This  increase  of  demand  and  diminution  in  the  supply  of 
money  force  up  the  interest  rate  on  short-time  loans. 
Money — actual  cash — is  needed  by  many  people  to  meet 
immediate  engagements  and  they  are  willing  to  pay 
almost  any  price  for  it.  In  the  last  panic  the  rates  for 
call  money  went  up  to  over  100  per  cent  and  in  many 
cities  in  the  United  States  clearing-house  certificates  and 
other  substitutes  for  money  were  issued  for  use  in  ordi- 
nary retail  trade. 

But  even  at  these  very  high  rates  money  can  often 
not  be  borrowed.  Many  merchants  and  nianufacturers 
are  compelled  to  sell  their  goods  at  a  sacrifice  in  order  to 
obtain  it.  Vast  quantities  of  goods  and  securities  are 
thrown  on  the  market  just  when  investors  and  consum- 
ers feel  least  able  to  purchase.  The  result  is  a  fall  in 
prices.  Such  a  fall  in  prices  lowers  profits.  Enterprises 
have  been  started  and  engagements  made  on  the  supposi- 
tion that  prices  would  continue  at  the  old  high  level. 


86  Business  Economics 

When  they  fall  it  is  impossible  to  pay  interest  out  of  cur- 
rent earnings.  Foreclosures  and  readjustments  take 
place.  There  is  a  general  liquidation  and  reorganization 
of  industry.  When  interest  contracts  have  been  adjusted, 
then  the  effect  on  wages  begins  to  be  felt.  As  long  as  a 
manufacturer  is  struggling  to  maintain  his  credit  he  will 
keep  his  factory  going,  but  when  he  has  failed  and  per- 
haps been  foreclosed,  then  the  factory  stops.  Men  are 
thrown  out  of  work,  and  w^ages — the  price  of  labor — fall. 
Labor  troubles  usually  mark  the  end  of  such  a  period  of 
readjustment. 

RECURRENCE    OF    CRISES 

This  stage  marks  the  end  of  the  crisis  and  the  begin- 
ning of  a  period  of  depression  or  ''hard  times,"  which 
continues  for  a  longer  or  shorter  period.  The  panic  of 
1893  was  followed  by  a  long-continued  depression  which 
lasted  until  1897,  a  period  which  was  marked  by  low 
prices  and  slack  work.  In  1898  began  a  revival  of  busi- 
ness and  an  era  of  marked  prosperity  set  in  which  con- 
tinued for  almost  ten  years,  interrupted  only  slightly  by 
a  ''Wall  Street  panic"  in  1903.  In  October,  1907,  a  severe 
crisis  occurred,  recovery  from  which,  however,  was  re- 
markably rapid.  The  periodicity  which  has  attended 
crises  in  the  past  is  so  marked — occurring  as  they  have 
at  intervals  of  about  ten  years — that  many  writers  con- 
sider them  inevitable.  As  the  easiest  way  to  answer  this 
question  we  may  take  up  three  main  theories  as  to  the 
causes  of  crises. 

THE   SUN-SPOT   THEORY  OF   CRISES 

A  much  quoted,  but  now  generally  discredited,  theory 
is  that  of  W.  S.  Jevons,  a  noted  English  economist,  who 
ascribed  crises  to  sun-spots.    Every  ten  years  and  a  frac- 


Speculation  and  Crises  87 

tion  there  occur  outbursts  of  electrical  and  heat  energy 
on  the  sun,  which  we  call  sun-spots.  These  result  in  in- 
creased heat  waves,  which  affect  the  crops  on  the  earth, 
causing  enlarged  harvests  in  Europe  and  the  United 
States  and  drought  and  famine  in  India  and  the  tropics. 
The  large  harvests  and  good  prices  start  a  wave  of  pros- 
perity and  speculation,  which  culminates  inevitably  in  a 
panic  and  depression,  until  a  recurrence  of  the  heat  phe- 
nomenon starts  the  cycle  again.  The  theory  states  some 
undoubted  facts,  but  no  causal  connection  between  sun- 
spots  and  crises  can  be  traced,  as  the  latter  are  too  irreg- 
ular and  the  two  do  not  always  coincide.  Were  this  the- 
ory true,  crises  would  be  beyond  human  control. 

THE    OVER-PRODUCTION    THEORY    OF    CRISES 

A  second  theory,  or  group  of  theories,  is  that  which 
attributes  crises  to  over-production.  Under  modem  con- 
ditions of  industry  a  small  group  of  men  direct  industry 
and  determine  what  shall  be  produced.  They  try  to  esti- 
mate future  demand  and  to  adjust  production  to  con- 
sumption, but  they  often  make  mistakes.  They  divert 
capital  into  unproductive  industries,  they  produce  the 
wrong  things  and  create  a  comparative  glut  in  certain 
lines,  and  when  they  cannot  sell  their  goods  at  a  profit- 
able price  they  fail  and  precipitate  a  crisis.  Industry 
must  then  be  reorganized  and  frequently  control  be  put 
in  the  hands  of  other  men. 

A  variation  has  been  given  this  theory  by  the  socialists, 
under  the  leadership  of  Rodbertus,  who  insist  that  the 
reason  that  there  is  over-production  is  because  of  the  in- 
stitution of  private  property.  Since  the  capitalists  own 
all  the  tools  of  production  they  pay  the  laborers  only 
starvation  wages.  The  latter  cannot  possibly  buy  all 
that  is  produced  and  commodities  consequently  heap  up 


88  Business  Economics 

in  the  warehouses  until  they  are  thrown  upon  the  mar- 
ket to  be  sold  at  any  price.  Then  a  panic  occurs  and  a 
readjustment  of  production  takes  place. 

THE    CREDIT    THEORY    OF    CRISES 

The  last  of  these  theories  regards  a  crisis  as  essentially 
due  to  a  failure  of  credit.  It  is  seen  that  a  large  part  of 
modern  industry  is  carried  on  with  borrowed  capital,  by 
roundabout  processes,  and  for  a  distant  market  and  not 
upon  order.  That  is,  the  success  of  a  business  depends 
upon  its  ability  to  sell  its  goods  when  produced.  Now  the 
aggregate  volume  of  transactions  that  can  be  carried  on 
in  a  year,  so  runs  the  theory,  depends  upon  the  efficiency 
of  the  credit  system — that  is,  in  general,  upon  the  freedom 
with  which  banks  are  willing  to  loan  money  to  people  who 
engage  to  repay  it  in  the  future  out  of  their  ventures.  If 
for  any  reason  the  banks  reduce  this  accommodation  the 
amount  of  business  that  can  be  transacted  upon  borrowed 
capital  is  lessened.  Either  some  transactions  must  stop 
or  prices  must  fall.  Either  of  these  events  causes  com- 
mercial disaster.  The  contraction  of  credit  makes  it  im- 
possible to  get  the  goods  into  the  right  hands,  and  so  we 
have  the  phenomenon  of  over-production  in  a  great  many 
lines.  As  exchange  and  transportation  have  developed 
and  markets  mdened,  crises  have  become  more  universal. 
According  to  this  theory,  they  are  inseparably  connected 
with  the  use  of  credit  and  can  be  controlled  only  by  a 
more  careful  granting  of  credit  by  the  banks  to  industrial 
managers. 

Another  phase  of  the  credit  theory  is  presented  by 
those  who  insist  that  the  cause  of  crises  is  the  rhythmic 
over-estimation  of  the  profits  to  be  secured  out  of  certain 
lines  of  production,  or  their  over-capitalization.  The 
new  enterprises  are  financed  by  the  banks  on  the  basis  of 


Speculation  and  Crises  89 

this  mistaken  over-capitalization,  their  organizers  en- 
gage to  pay  rates  of  interest  which  they  cannot  earn,  and 
the  crash  inevitably  follows.  This  is  often  called  the 
over-capitalization  theory,  and  it  is  essentially  psycholog- 
ical in  its  character. 

There  is  no  doubt  as  to  the  truth  contained  in  this 
last  theory.  It  helps  to  explain  the  rhythmic  periodicity 
of  crises.  After  every  period  of  business  depression  con- 
fidence revives  and  hope  is  renewed;  over-estimation  of 
the  success  of  new  ventures  is  inevitable.  Then  follows  a 
mistaken  investment  of  capital  in  certain  lines  of  pro- 
duction, as  in  railroads  in  1884,  and  a  relative  over-pro- 
duction of  certain  commodities  at  profitable  prices.  The 
true  explanation  seems  to  be  found  in  a  combination  of 
the  over-production  and  over-capitalization  theories. 

CAlSr    CEISES    BE    PKEVENTED? 

The  practical  problem  that  presents  itself  in  this  con- 
nection is  the  question  as  to  whether  it  is  possible  to  pre- 
vent the  recurrence  of  crises.  In  view  of  the  explanation 
just  given  it  would  seem  that  they  must  be  regarded  as 
unpreventable  as  long  as  industry  is  carried  on  under  the 
competitive  capitalistic  system  of  production  and  the 
modern  credit  system.  Moreover  crops  differ  in  amount 
from  year  to  year  and  probably  always  will.  Human  pro- 
duction and  human  genius  are  unequal.  Crises  may  be 
regarded  as  the  price  a  progressive  society  pays  for  its 
advance,  and  they  may  be  expected  to  recur  pretty  regu- 
larly at  periodic  inter\''als.  Their  disastrous  effects  may, 
however,  be  greatly  lessened  by  wise  currency  legislation, 
by  greater  care  in  granting  credit,  and  by  greater  ^visdom 
in  the  direction  of  individual  effort. 


90  Business  Economics 

TEST  QUESTIONS 

1.  What  are  some  of  the  factors  that  make  chance  and  change 
inseparable  from  modern  industry? 

2.  How  does  the  speculator  reduce  for  the  merchant  the 
speculative  risk  attached  to  price  fluctuations  ?    Illustrate. 

3.  How  do  stock  and  produce  exchanges  assist  the  speculator 
in  this  function? 

4.  Explain  the  difference  between  legitimate  speculation  and 
gambling. 

5.  What  is  meant  by  a  crisis? 

6.  Discuss  the  immediate  occasion  of  a  crisis. 

7.  Account  for  the  recurring  features  of  crises. 

8.  What  was  Jevons'  sun-spot  theory  of  crises? 

9.  Explain  the  overproduction  theory  of  crises.  Suggest  an 
illustration  from  our  own  histoiy  that  would  seem  to  support 
this  theory. 

10.  What  are  the  essential  characteristics  of  the  credit  theory 
of  crises? 

11.  What  theory  of  crises  seems  most  reasonable  to  you? 

12.  What  suggestions  have  you  to  make  as  to  how  crises  may 
be  prevented? 


CHAPTER  VII 
the  modern  wage  system 

The  Factory  System  and  Labor 

We  have  already  characterized  the  modern  system  of 
industry  as  capitalistic,  that  is,  as  involving  the  use  of 
expensive  and  complex  machinery  in  factories  under  the 
control  of  the  capitalist  managers  of  industry.  As  we 
have  seen,  such  a  system  has  caused  an  enormous  in- 
crease in  the  production  of  wealth ;  it  has  also  raised  the 
general  standard  of  comfort  and  the  level  of  wages  and 
has  relieved  labor  to  a  considerable  extent  of  the  deadly 
strain  of  hard  manual  toil  that  was  characteristic  of  pre- 
ceding systems. 

The  factory  system,  under  which  capitalistic  produc- 
tion is  now  carried  on,  may  also  fairly  be  credited  with 
other  beneficial  results.  As  steadiness  and  punctuality 
are  essential,  it  has  on  the  whole  led  to  increased  sobriety 
and  temperance;  the  work  in  general  is  healthier,  being 
performed  under  better  sanitary  conditions  than  under 
the  old  domestic  system;  the  intellectual  status  of  the 
workingman  has  been  raised,  as  vastly  more  intelligence 
is  required  of  a  skilled  machine  operator  than  of  the  old- 
time  hand  laborer;  and  finally  the  general  well-being  of 
the  working  class  has  been  improved,  as  they  have  shared 
in  the  larger  production  made  possible  by  machine 
methods. 

91 


92  Business  Economics 

But,  on  the  other  hand,  the  new  processes  and  methods 
have  been  accompanied  by  great  abuses,  though  never  so 
great  in  this  country  as  in  England.  Long  hours,  the 
employment  of  women  and  children,  the  weakened  eco- 
nomic position  of  the  laborer,  fluctuations  in  production, 
liability  to  be  without  employment,  industrial  accidents, 
the  abolition  of  personal  ties  between  employer  and  em- 
ploye, the  crowding  of  workmen  into  a  small  space  to 
work  by  day,  and  their  concentration  in  city  tenements 
by  night — these  are  some  of  the  problems  for  which  the 
factory  system  must  be  held  responsible.  The  condition 
and  position  of  labor  have  been  vitally  affected.  So  far 
we  have  considered  mainly  the  problems  connected  with 
the  organization  and  use  of  capital.  We  must  now  take 
up  the  various  questions  connected  with  the  relation  of 
labor  to  capital  and  to  the  capitalistic  system  of  pro- 
duction. 

The  Wage-Eaening  Class 

One  of  the  most  vital  factors  in  the  situation — which 
we  must  frankly  admit  at  the  start — is  the  existence  in 
modern  industrial  society  of  a  distinct  wage-earning 
class.  It  is  perfectly  obvious  that  under  present  condi- 
tions of  production  great  capital  or  great  ability  is  nec- 
essary in  order  to  become  the  manager  of  an  industrial 
enterprise.  Most  laborers  do  not  possess  either  the  one  or 
the  other  of  these,  and  although  there  are  fortunate  ex- 
amples of  industrial  leaders  who  have  risen  from  the 
ranks,  the  general  rule  is,  once  a  wage-earner,  always  a 
wage-earner. 

The  number  of  those  who  can  achieve  industrial  inde- 
pendence is  moreover  growing  smaller  as  business  be- 
comes more  specialized  and  centralized.  The  laborer 
therefore  belongs  to  a  class  which' is  rapidly  developing 


Modern  Wage  System  93 

what  the  German  socialists  call  ''class-consciousness," 
that  is,  the  feeling  that  he  belongs  to  a  distinct  industrial 
group  with  interests  different  from  and  often  antagonis- 
tic to  those  of  other  groups  or  classes.  In  his  struggles 
with  employers  over  wages  this  antagonism  of  immediate 
aims  obscures  the  deeper  mutuality  and  interdependence 
of  their  really  complementary  interests  and  not  infre- 
quently leads  to  a  feeling  of  hostihty,  finding  expression 
in  strikes  and  labor  agitation. 

Dependence  of  the  Wage-Eaener 

In  the  transition  to  the  factory  system  Mr.  John  A. 
Hobson  1  points  out  that  the  position  of  the  laborer 
has  been  one  of  increasing  dependence  in  the  following 
five  important  points: 

First,  ownership  of  material.  At  first  the  worker 
owned  this  and  made  it  into  the  finished  product,  but  now 
he  has  only  a  passing  interest  in  a  small  part  of  the 
process  of  working  it  up. 

Second,  ownership  of  tools.  He  retained  these  up  to 
the  time  of  the  introduction  of  machinery,  but  now  sel- 
dom owns  them. 

Third,  control  of  productive  power.  With  the  displace- 
ment of  hand  labor  and  muscular  power  by  steam-driven 
machinery,  he  no  longer  owns  even  this. 

Fourth,  relations  between  workers  and  employers. 
They  were  formerly  on  an  equality ;  under  the  guild  sys- 
tem the  master  and  the  apprentice  had  the  same  social 
position;  now  the  laborer  has  sunk  in  the  scale,  or  the 
employer  has  risen,  until  the  only  bond  between  them 
is,  as  Carlyle  said,  the  ''cash  nexus."  A  case  was  re- 
cently instanced  where   a  workingman  who   had  been 

1  Evolution  of  Modern  Capitalism,  p.  35. 


94  Business  Economics 

working  in  a  factory  met  his  employer  for  the  first  time 
at  the  end  of  seventeen  years. 

Fifth,  work-place.  Until  the  establishment  of  the  fac- 
tory system  this  had  always  been  the  home ;  now  it  is  the 
factory,  and  there  is  a  complete  divorcement  between 
work  and  the  home. 

The  Wage  System 

Another  characteristic  of  modern  industry  from  the 
labor  point  of  view  is  the  existence  not  merely  of  a  wage- 
earning  class,  but,  more  fundamental,  of  the  wage  sys- 
tem. President  Hadley,  of  Yale  University,  writes  as 
follows :  ^ 

It  is  characteristic  of  the  modem  industrial  system  that  a 
laborer  who  owns  no  capital,  though  nominally  free  to  do  what 
he  pleases,  must  actually  find  some  property  owner  who  will  give 
him  enough  to  keep  him  alive  during  the  period  which  must 
elapse  between  the  rendering  of  the  labor  and  the  sale  of  the 
finished  product.  Under  such  circumstances,  the  laborer  almost 
inevitably  submits  to  the  direction  of  the  property  owner  in 
deciding  how  his  labor  shall  be  applied.  Laborers  without  cap- 
ital must  necessarily  work  on  this  basis;  even  those  who  have 
small  amounts  of  capital  habitually  do  so.  Such  advances  of 
capital  are  known  as  wages^ 

Here  we  have  the  essence  of  the  wage  system  in  a  nut 
shell.  The  laborer  sells  his  labor  to  an  employer  for  a 
stipulated  wage.  He  has  a  connnodity,  his  labor,  consist- 
ing of  a  certain  amount  of  strengtli  and  skill,  which  he 
is  free  to  dispose  of  on  the  market  to  the  best  advantage, 
as  the  owner  of  any  other  commodity  might  do.  Legally, 
labor  is  property. 

2  Economics,  p.  121. 


Modern  Wage  System  95 

Owing,  however,  to  the  fact  that  all  modern  production 
requires  capital,  the  only  buyer  of  his  labor  is  a  capi- 
talist, who  directs  the  way  in  which  the  labor  shall  be 
applied.  Such  a  condition,  as  well  as  some  peculiarities 
of  the  commodity — labor,  leaves  the  laborer,  indeed,  only 
nominally  free.  In  theory  the  labor  contract  is  a  per- 
fectly free  contract,  entered  into  voluntarily  by  both  em- 
ployer and  wage-earner,  and  the  courts  have  generally 
insisted  that  this  theoretical  freedom  must  be  main- 
tained. In  practice  various  modifications  of  the  theory 
have  taken  place.  Legislation  has  been  passed  protect- 
ing laborers  from  bargaining  away  their  rights,  and 
trade  unions  have  been  formed  to  bargain  collectively 
for  a  group  of  laborers.  In  the  last  analysis,  however, 
the  laborer  must  support  himself  by  the  sale  of  his  labor ; 
society  guarantees  him  neither  a  living  nor  even  the  right 
to  work.  He  is  a  bargainer  in  a  competitive  industrial 
world  and  he  must  assume  the  responsibility  of  providing 
for  himself  and  his  family  by  securing  w^ork.  Just  what 
is  involved  in  such  a  statement  is  perhaps  best  brought 
out  by  comparing  the  modern  wage  system  with  pre- 
vious systems  of  labor. 

The  Evolution  of  the  Wage  Contract 

The  first  historical  system  of  labor,  aside  from  that  in 
the  family,  was  that  of  slaves.  In  this  case  the  labor  was 
forced  and,  being  given  under  coercion,  was  prob- 
ably very  inefficient;  but  the  laborer  was  at  least  assured 
of  a  minimum  of  food,  clothes,  and  shelter.  Slavery  was 
the  main  source  of  manual  labor  in  the  ancient  world, 
and  did  not  disappear  in  England  until  the  eleventh  cen- 
tury. The  feudal  system  of  the  Middle  Ages  Avas  char- 
acterized by  serfdom,  according  to  which  the  laborer  was 
bound  to  the  soil  and  was  compelled  to  render  his  lord 


96  Business  Economics 

certain  services.  Gradually  serfdom  was  broken  down 
and  the  wage  system  took  its  place,  although  remnants 
of  serfdom  remained  in  England  until  the  eighteenth 
century. 

Four  centuries  before  this,  however,  the  disintegration 
of  the  feudal  society  had  already  begun,  the  serfdom  of 
the  agricultural  laborer  was  commuted  into  regular 
money  payments,  and  the  artisan  bought  or  otherwise 
secured  his  freedom  from  feudal  exactions.  In  the  towns 
industry  was  regulated  by  the  guilds,  and  while  at  first 
they  were  distinctly  beneficial,  in  time  they  became  mo- 
nopolistic and  oppressive.  Power  was  lodged  in  the 
hands  of  the  wealthy  traders  and  merchants  and  they  leg- 
islated in  their  own  behalf  against  the  growing  class  of 
laborers,  as  did  the  wealthy  landowners  against  the  agri- 
cultural laborers.  The  Statute  of  Laborers  and  other 
acts  sought  to  fix  wages  and  to  prevent  the  freedom  of 
the  laborer  in  moiing  about  or  choosing  his  own  occupa- 
tion. Not  indeed  until  the  nineteenth  century  were  the 
last  of  these  old  regulative  laws  repealed  and  the  mod- 
ern labor  contract  recognized  in  law  and  practice  as  a 
free  contract.  **The  growth  of  labor,"  says  Brentano, 
**has  been  from  the  system  of  authority  to  the  system  of 
contract."  The  system  of  authority,  by  which  rates  of 
wages,  length  of  apprenticeship,  and  other  details  of  in- 
dustry were  fixed  by  some  superior  authority,  was  found 
to  be  restrictive,  uneconomic,  and  unjust,  and  it  gave  way 
to  the  principle  of  economic  freedom.  According  to  the 
newer  theory,  first  given  effective  voice  in  1776  by  Adam 
Smith,  the  individual  should  be  left  to  himself,  as  he 
knows  his  own  interest  better  than  does  the  most  enlight- 
ened government.  The  freest  scope  was  given  to  the 
powers  of  individuals  and  each  was  to  be  the  unlimited 
master  of  himself  and  his  possessions. 


Modern  Wage  System  97 

Public  Regulation  of  Labok  Conditions 

It  has  since  been  found  necessary,  however,  to  modify 
both  the  theory  and  practice  of  this  extreme  individualism 
in  order  to  protect  the  interests  of  various  classes  of  so- 
ciety, especially  the  laborer.  The  legal  theory  still  is  that 
*' today  the  labor  contract  is  perfectly  free:  either  side 
may  make  whatever  contract  he  can  get  the  other  side  to 
sign.  Not  only  this,  but  either  side  may  freely  combine 
to  demand  any  form  of  contract  from  the  other  side,  as 
mere  combinations  alone  are  now  made  perfectly  legal."  ^ 
In  practice,  however,  this  complete  freedom  has  been 
greatly  modified  by  factory  acts,  acts  restricting  the 
hours  and  conditions  of  employment  of  women  and  chil- 
dren, anti-truck  acts,  laws  providing  for  weekly  pay- 
ments, guarding  of  machinery,  limiting  the  hours  of  la- 
bor, and  on  the  other  hand  prohibiting  intimidation  and 
molesting.  For  the  most  part  these  laws  have  applied  to 
women  and  children,  who  are  thought  less  capable  of 
guarding  their  own  interests,  and  to  a  much  less  degree 
to  labor  contracts  made  by  men,  who  have  been  consid- 
ered better  able  to  make  equal  contracts  with  employers. 
But  concerning  certain  conditions  of  employment  it  has 
been  realized  that  even  adult  males  are  not  capable  of 
securing  equitable  bargains,  and  along  these  lines  the 
nominal  freedom  of  the  labor  contract  has  been  decidedly 
abridged.  The  attitude  of  the  courts  toward  such  legisla- 
tion shows  that  they  have  declared  many  laws  unconsti- 
tutional on  the  ground  that  they  infringe  upon  the  right 
of  free  contract,  but  in  the  long  run  seem  inclined  to  up- 
hold as  much  of  this  restrictive  legislation  as  seems  nec- 
essary to  obviate  the  undoubtedly  evil  results  that  flow 
from  this  real  inequality  of  employer  and  laborer. 

3  Stimson,  Labor  in  its  Relation  to  Law,  p.  51 


98  Business  Ecunomics 

It  is  a  very  vital  and  important  practical  economic 
problem  that  presents  itself  in  this  connection.  How  far 
shall  we  carry  this  regulative  principle,  or  how  far  shall 
we  insist  upon  the  principle  of  freedom?  Many  labor 
leaders  are  again  asking  for  an  effectual  control  of  the  la- 
bor contract,  not  by  the  action  of  trade  unions,  but  by  the 
direct  legislation  of  the  state.  What  shall  be  our  attitude 
to  this  demand?  Before  we  can  fairly  answer  this  ques- 
tion we  must  consider  somewhat  more  fully  the  character 
of  the  bargain  that  takes  place  between  an  employer  and 
an  individual  workman  and  the  nature  of  the  commodity 
that  the  laborer  has  to  sell. 

Labor's  Bargaining  Power 

It  has  already  been  stated  that  the  commodity  which 
the  laborer  brings  upon  the  market  is  his  labor,  that  is, 
himself,  his  time,  and  his  energies.  But  these  wares  are 
peculiar  and  differ  in  several  important  respects  from  or- 
dinarj^  marketable  commodities.  In  the  first  place  labor 
is  like  a  perishable  commodity  which  must  be  sold  at  once 
if  the  owner  is  not  to  incur  loss.  The  laborer  has  usually 
little  if  any  capital  with  which  to  support  himself  in  case 
he  cannot  find  work,  and  he  may  be  compelled  to  make  a 
forced  sale  of  his  labor,  that  is,  to  accept  unduly  low 
wages.  In  this  respect  then  he  is  at  a  disadvantage  in 
bargaining  with  his  employer.  A  second  peculiarity  of 
the  sale  of  labor  is  that  the  laborer  and  his  work  are  in- 
separable. The  seller  of  an  ordinary  commodity  disposes 
of  it  absolutely  when  he  makes  a  sale. 

It  matters  nothing  to  the  seller  of  l^ricks  whether  they  are  to 
be  used  in  building  a  palace  or  a  sewer;  but  it  matters  a  great 
deal  to  the  seller  of  labor,  who  undertakes  to  perform  a  task  of 
given  difficulty,  Avhether  or  not  the  place  in  which  it  is  to  be 


Modern  Wage  System  99 

done  is  a  wholesome  and  a  pleasant  one,  or  whether  or  not  his 
associates  will  be  such  as  he  cares  to  have. 

The  person  who  buys  this  labor  necessarily  directs  the 
application  of  it  to  the  task  in  hand,  and  thus  controls 
very  largely  the  place,  the  sanitary  and  social  conditions, 
the  hours,  the  character,  and  safety  of  the  work.  In  the 
third  place  the  superior  knowledge  and  intelligence  of 
the  employers  give  them  an  advantage  in  bargaining 
with  their  employes,  while  the  reluctance  of  employers  to 
"spoil  the  labor  market"  often  prevents  that  freedom 
of  competition  which  is  supposed  to  secure  to  the  laborer 
his  full  share  of  the  product  he  helps  to  produce. 

Necessity  of  Protective  Legislation 

In  \dew  of  these  facts  we  may  fairly  conclude  that 
workmen  are  inferior  to  employers  as  bargainers  and 
that  protective  legislation  is  necessary  in  order  to  put 
them  on  a  real  equality. 

When  laborers  have  to  make  a  forced  sale  of  their  labor,  their 
freedom  of  contract  is  more  nominal  than  real.  When  women 
and  children  stand  individually  before  the  manager  of  hundreds 
of  thousands  of  capital,  it  is  possible  that  there  may  lie  little 
freedom  and  less  equality  in  the  contract  by  which  they  sell 
their  services.^ 

It  is  clear  that  between  two  parties  of  such  unequal 
knowledge,  resources,  and  ability  as  a  laborer  and  his 
employer  the  labor  contract  cannot  be  entirely  free  and 
equal.  AVhile  trade  unions,  by  combining  isolated  work- 
men into  formidable  and  unified  groups,  have  immeas- 
urably increased  their  bargaining  strength,  yet  legisla- 

4  Bullock,  Introduction  to  the  Stndij  of  Economics,  p.  428. 


100  Business  Economics 

tion  has  also  been  found  necessary  to  remedy  the  disad- 
vantages already  enumerated.  It  is  realized  that  **  there 
is  no  greater  inequality  than  the  equal  treatment  of  un- 
equals." 

In  the  opening  chapter  of  this  book  attention  was 
called  to  the  fact  that  economic  freedom  or  liberty  was 
one  of  the  corner  stones  of  our  modern  industrial  society. 
But  freedom  can  best  be  secured  by  securing  equality 
and  responsibility.  Factory  legislation  and  labor  laws 
are  designed  to  correct  the  inequalities  imposed  by  na- 
ture or  involved  in  the  very  nature  of  capitalistic  pro- 
duction. Direct  interference  by  the  state  in  the  freedom 
of  contract  is  justified  as  leading  to  a  more  real  and  cer- 
tain equality  and  liberty.  But  while  we  may  thoroughly 
approve  the  principle  of  labor  legislation  it  is  difficult  to 
know  at  what  point  we  should  stop. 

A  leading  American  authority  on  the  law  of  labor  has 
stated^  that  *'the  industrial  laborer  at  least  is  beginning 
to  be  a  privileged  class  in  the  law\"  On  the  other  hand, 
it  was  possible  for  Disraeli  to  say  as  late  as  1875,  after 
the  passage  of  the  Employers  and  Workmen  Act  by  the 
British  Parliament,  that  "for  the  first  time  in  the  history 
of  this  country  employer  and  employed  sit  under  equal 
laws."  So  recently  were  the  legal  disabilities  removed 
under  which  the  English  workmen  had  suffered  up  to 
this  time.*'  The  pendulum  has  s^\Ting  so  rapidly  and  so 
far  in  labor's  direction  in  the  last  generation  that  it  is  a 
fair  question  how  far  it  will,  or  should,  continue  to  go. 

5  Stimson,  Labor  in  Its  Belation  to  Law,  p.  71. 

sEuegg,  Law  of  Employer  and  Workman  in  England,!^.  99. 


Modern  Wage  System  101 

TEST  QUESTIONS 

1.  How  is  the  modern  wage  system  dependent  upon  the  fac- 
tory system  in  industry? 

2.  What  do  we  mean  by  a  distinct  wage-earning  class?  To 
what  problems  does  it  give  rise? 

3.  Name  five  points  which  Mr.  Hobson  gives  to  show  that  in 
the  transition  to  the  factory^  system,  the  position  of  the  laborer 
has  been  one  of  increasing  dependence. 

4.  What  is  President  Hadley's  explanation  of  the  wage  sys- 
tem? 

5.  Why  has  the  wage  contract  been  subject  to  severe  ques- 
tioning during  the  last  quarter  of  a  century? 

6.  What  does  Brentano  mean  by  the  sentence,  "The  growth 
of  labor  has  been  from  the  system  of  authority  to  the  system 
of  contract"? 

7.  How  has  the  extreme  individualism  of  Adam  Smith's 
theory  been  modified? 

8.  What  are  the  three  peculiarities  in  the  sale  of  labor? 

9.  Why  has  protective  labor  legislation  become  a  necessity? 


CHAPTER  VIII 
labor  organizations  and  coliiective  bargaining 

Causes  of  Laboe  Oeganizations 

As  modern  capitalistic  production  caused  the  growth 
of  a  distinct  wage-earning  class  and  brought  about  a 
sharp  separation  between  employers  and  laborers,  and  as 
the  latter  were  thrown  upon  their  own  resources  under 
the  prevailing  theories  of  free  competition  and  free  con- 
tract, it  was  inevitable  that  they  should  organize  to  se- 
cure their  interests  as  a  class.  The  growth  of  labor  or- 
ganizations has  been  greatest  in  those  countries  where 
the  laborer  has  been  forced  to  depend  mostly  upon  his 
own  efforts  for  protection  and  improvement,  namely,  in 
England  and  the  United  States.  On  the  continent  of 
Europe,  on  the  other  hand,  where  the  individual  has  been 
accustomed  to  look  to  the  government  for  the  redress  of 
industrial  grievances,  there  has  been  a  much  less  vigor- 
ous and  spontaneous  development  of  such  organizations. 
They  are  a  product  of  the  nineteenth  century  and  had 
their  origin  in  modern  machine  production. 

Types  of  Labor  Organizations 

The  growth  of  labor  organizations  in  the  United  States 
has  proceeded  hand  in  hand  with  the  industrial  develop- 
ment of  this  country,  and  has  been  especially  rapid  since 
the  Civil  War.  Two  distinct  types  of  trade  unions  may 
be  noted:  the  local  and  the  national  (or  international) 

102 


Labor  Organizations  103 

unions.  The  former,  which  comprises  members  who  live 
and  work  in  the  same  locality,  is  the  primary  unit,  and 
dates  back  to  the  beginning  of  the  century.  Each  local 
union,  even  when  subordinate  to  a  national  organization, 
is  a  self-governing  unit  and  is  absolutely  democratic.  Its 
relation  to  the  national  body  has  been  well  compared  to 
that  of  one  of  our  states  to  the  United  States.  The  first 
national  union  was  not  formed  until  1850,  but  now  these 
far  surpass  the  locals  in  importance.  Their  government 
is  representative,  as  they  are  made  up  of  local  unions. 

The  great  majority  of  the  national  trade  unions  are 
bound  together  in  the  powerful  federal  organization,  the 
American  Federation  of  Labor.  The  membership  of  this 
body  numbers  about  1,800,000,  while  the  railroad  broth- 
erhoods, which  are  not  connected  with  it,  claim  about 
335,000  more.  Somewhat  over  2,000,000  persons  in  the 
United  States  belong  to  labor  organizations.  This  is 
about  10  per  cent  of  the  total  working  population  or 
about  15  per  cent  of  those  engaged  in  trade  and  trans- 
portation, manufacturing,  and  mechanical  pursuits. 
Wliile  this  does  not  seem  a  very  large  proportion  and  is 
not  as  large  as  the  membership  of  British  trade  unions, 
yet  it  must  be  remembered  that  they  constitute  on  the 
whole  the  elite  of  the  labor  world  and  exercise  an  au- 
thority and  power  out  of  proportion  to  their  numbers. 
Many  other  workmen  who  do  not  themselves  belong  to 
the  unions  follow  their  lead  and  are  directly  affected 
by  their  actions. 

Nationai.  Okganizations 

Historically  the  two  most  important  national  organi- 
zations in  this  country  have  been  the  Knights  of  Labor 
and  the  American  Federation  of  Labor,  and  they  repre- 
sent such  different  principles  that  it  will  be  worth  while 


104  Business  Economics 

to  describe  them.  The  Knights  of  Labor  was  organized 
in  1869  as  a  local  union  of  seven  garment  cutters  and  had 
a  meteoric  career,  counting  a  membership  of  730,000  in 
1886,  the  year  of  its  greatest  strength.  It  was  a  national 
amalgamation  of  mixed  local  assemblies  composed  of 
workers  of  all  trades  who  lived  in  the  same  locality.  It 
held  the  theory  that  the  interests  of  all  members  of  the 
laboring  class  are  identical  and  must  be  cared  for  at  the 
same  time,  if  possible,  by  political  action,  by  co-operation, 
and  by  education.  In  1886,  however,  it  entered  upon  a 
series  of  disastrous  strikes;  later  it  came  into  conflict 
with  trade  unions  which  had  not  joined  its  ranks  and 
were  opposed  to  its  policies;  and  finally  it  became  en- 
tangled in  politics. 

As  it  lost  in  influence  and  strength  its  place  was  taken 
by  the  American  Federation  of  Labor,  which  was  its  very 
opposite  in  organization  and  government.  This  latter 
body  is  a  "confederation  of  trade  and  labor  unions," 
each  trade  being  organized  separately  into  local  unions 
which  are  given  great  autonomy,  these  unions  alone  be- 
ing represented  in  the  national  body.  Only  matters  of 
general  interest  come  before  it,  all  local  trade  matters 
being  left  to  the  local  unions. 

Objects  and  Methods  of  Labor  Unions 

More  important  than  the  history  of  labor  organiza- 
tions is  a  knowledge  of  their  objects  and  methods.  The 
primary  purpose  is  of  course  to  control  the  conditions  of 
labor  and  to  substitute  the  principle  of  collective  bar- 
gaining for  individual  contract.  As  one  of  the  most  ef- 
fective ways  to  secure  this  result  they  aim  at  a  more  or 
less  complete  monopoly  of  the  labor  market.  This  they 
may  do  by  bringing  all  workers  in  a  trade  within  the 
union  or  by  preventing  non-union  men  from  working. 


Labor  Organizations 


105 


Fig.  9. — Organization  of  the  American  Federation  of  Labor.     From  Eeport 
of  Executive  Council 


106  Business  Economics 

The  first  of  these  is  called  the  inclusive  method,^  and  if 
successful  makes  the  union  the  sole  seller  of  the  kind  of 
labor  controlled  by  its  members.  It  is  a  monopoly  of  the 
laborers  against  the  employers  and  is  sought  to  be  en- 
forced by  inducing  men  to  join  the  union  either  by  per- 
suasion or  coercion,  the  latter  finding  expression  in  the 
strikes  against  the  employment  of  non-union  men  and 
the  insistence  upon  the  "closed  shop." 

The  other  form  of  monopoly  consists  in  the  exclusion 
of  non-members  from  the  trade  and  is  a  control  of  em- 
ployment; this  is  a  monopoly  of  a  small  group  against 
their  fellow-workmen.  It  is  enforced  by  regulating  the 
entrance  to  the  trade,  making  it  difficult  or  expensive, 
or  by  limiting  the  number  of  apprentices.  Sometimes, 
as  in  the  Chicago  Building  Trades  in  1900,  the  workers 
have  united  with  their  employers  by  means  of  **  exclu- 
sive agreements"  to  raise  wages  and  prices  of  the  fin- 
ished products  at  the  same  time,  and  thus  jointly  to  mulct 
the  public.  Such  efforts  to  monopolize  the  labor  market 
have  their  counterparts  in  the  organization  of  capital, 
as  we  have  seen.  In  practice  such  a  labor  monopoly  has 
sometimes  been  used  to  improve  and  elevate  conditions, 
just  as  sometimes  a  capitalistic  monopoly  has  reduced 
prices  below  the  competitive  point.  In  general,  however, 
we  must  condemn  monopoly  on  principle  in  the  competi- 
tive field  and  insist  that  freedom  and  opportunity  be 
given  to  all  on  as  equal  terms  as  possible.  Of  the  two 
forms  of  trade  union  monopoly,  the  former  alone,  which 
endeavors  to  make  it  all-comprehensive  and  to  enforce 
union  conditions  generally,  can  be  economically  justified. 

Standard  Rate  of  Pay 

"The  establishment  of  a  standard  rate  of  wages  may 
perhaps  be  said  to  be  the  primary  object  of  trade  union 

1  Eeport  of   Industrial  Commission,  Vol.   XVii,  p.   1. 


Labor  Organizations  107 

policy.  Without  the  standard  rate  the  trade  union,  such 
as  it  is,  could  have  no  existence. ' '  -  The  purpose  of  the 
union  is  to  substitute  collective  bargaining  for  individ- 
ual agreements  and  thereby  to  improve  the  condition  of 
its  members.  But  if  a  single  bargain  is  to  determine  the 
pay  of  a  large  number  of  men,  there  must  be  a  common 
standard.  In  every  employment  on  a  large  scale  the 
men  are  necessarily  grouped  together  and  their  pay  is 
determined  by  a  common  rule.  This  is  true  even  in  non- 
union shops. 

It  is  generally  assumed  that  the  standard  rate  of  labor 
organizations  means  a  uniform  wage  for  each  member, 
but  this  is  not  the  case ;  it  means  rather  a  uniform  rate  of 
pay  to  all  for  the  same  performance.  In  the  case  of 
piecework,  it  could  manifestly  not  mean  anything  else; 
but  a  large  number  of  labor  leaders  object  to  piecework. 
They  insist  that  a  standard  wage  means  a  minimum 
wage,  and  that  by  the  establishment  of  such  a  minimum 
the  whole  standard  of  efficiency  and  the  plane  of  com- 
petition are  raised,  as  the  employers  cannot  then  afford 
to  hire  any  but  competent  workmen. 

The  question  immediately  presents  itself:  Wliat  is  to 
become  of  the  older  or  partially  disabled  men  who  are  no 
longer  able  to  earn  the  standard  or  minimum  wage?  In 
England  they  are  practically  guaranteed  a  subsistence 
by  the  union;  in  this  country  the  union  not  infrequently 
exempts  them  from  the  provisions  as  to  the  standard 
wage.  When  the  rule  is  enforced  there  is  certainly  a  real 
hardship  for  these  men. 

But  from  the  employers  there  comes  the  more  serious 
complaint  that  the  effect  of  the  standard  wage  is  to  re- 
duce to  a  dead  level  the  efficient  and  the  inefficient;  that 

2  Eeport  of  Industrial  Commission,  Vol.  XVII,  p.  xJii. 


108  Business  Economics 

it  is  a  maximum  wage  and  that  the  efficient  and  indus- 
trious are  prevented  from  earning  more  than  a  fixed 
amount.  There  is  undoubtedly  a  great  deal  of  truth  in 
this  charge;  the  man  who  hastens  the  pace  is  said  to  be 
taking  "blood  money,"  and  sometimes  a  maximum  wage 
is  set  which  the  members  are  forbidden  to  exceed.  On 
the  other  hand  it  may  fairly  be  said  that  while  the  union 
regulation  of  wages  does  tend  to  produce  greater  uni- 
formity, the  union  rate  is  usually  higher  than  the  com- 
petitive rate  would  be,  that  is,  wages  are  leveled  up,  not 
down;  and  finally  that  territorial  variations  make  the 
local  rate  conform  to  local  conditions. 

Reduction  in  Working  Hoxtes 

A  reduction  in  the  hours  of  labor  has  been  even  more 
strenuously  urged  by  progressive  labor  leaders  in  the 
United  States  than  an  increase  in  wages.  * '  Organize  and 
control  your  trade  and  shorten  your  hours,"  is  their  con- 
tention, *'and  wages  will  take  care  of  themselves."  Their 
arguments  in  favor  of  a  general  shortening  of  the  work- 
ing day  are  twofold.  In  the  first  place,  owing  to  the  in- 
tensity and  strain  of  work  under  modern  machine  meth- 
ods, the  worker  cannot  work  efficiently  more  than  eight 
or  nine  hours  a  day.  The  work  is  too  exacting  and  the 
strain  on  the  attention  too  great;  it  is  a  noticeable  fact' 
that  most  of  the  accidents  in  industrial  establishments 
occur  in  the  last  hour  or  two  of  the  working  day.  Not 
only  that,  but  the  laborer  is  entitled  to  his  share  of  in- 
dustrial progress  in  the  form  of  more  leisure,  giving  him 
time  for  a  better  family  and  social  life,  affording  oppor- 
tunity for  intellectual  improvement,  and  permitting  the 
development  of  more  rational  and  higher  wants.  With 
the  improvement  in  the  condition  of  the  laboring  classes 
will  go  the  elevation  of  society  as  a  whole. 


Labor  Organizations  109 

The  second  argument  in  favor  of  shorter  hours  put  for- 
ward by  the  trade  unionist  is  economic  rather  than  so- 
cial. He  argues  that  a  * '  reduction  of  hours  will  diminish 
the  supply  of  labor  in  the  market,  and  so  will  raise  its 
price.  It  will  make  room  for  the  unemployed,  and  so  will 
remove  the  depressing  influence  of ,  their  competition. ' ' 
There  is  involved  in  this  contention  the  familiar  lump-of- 
labor  argument  of  the  trade  unionist:  There  is  just  so 
much  work  to  be  done,  and  if  some  men  do  a  little  less 
there  will  be  more  for  others.  By  shortening  everyone's 
hours  of  labor,  employment  will  be  made  more  general 
and  the  work  will  be  better  distributed. 

Now  the  economists  in  general  have  supported  the 
trade  unions  in  their  demands  for  a  shorter  working  day, 
but  they  have  done  so  because  they  believed  that  the 
product  of  industry  would  not  thereby  be  diminished. 
They  have  seen  that  when  the  hours  of  labor  were  re- 
duced the  laborer  was  less  rapidly  worn  out  physically, 
that  he  could  work  more  rapidly  for  a  short  time,  and 
that  his  increased  leisure  and  pay,  if  rationally  used, 
made  him  a  more  intelligent  and  efficient  worker.  In 
other  words,  a  reduction  in  the  hours  of  labor  from  15  a 
day  to  12,  to  10,  and  even  in  some  cases  to  8,  was  not  at- 
tended by  a  parallel  reduction  in  the  output,  but  the 
latter  remained  about  the  same.  This  is  the  great  eco- 
nomic justification  of  the  shorter  working  day,  and  as 
long  as  this  can  go  on  without  materially  affecting  the 
product  of  industry  it  must  be  approved. 

If,  however,  the  latter  is  decreased  there  will  be  less  to 
divide  and  then  the  relative  disadvantages  of  a  smaller 
dividend  must  be  weighed  against  the  advantages  of  in- 
creased leisure.  Of  course  the  point  to  which  the  num- 
ber of  hours  can  be  reduced  without  lessening  the  product 
can  be  determined  only  by  experiment,  and  will  differ  in 


110  Business  Economics 

different  trades,  but  it  is  inevitable  that  until  this  point 
is  reached  the  pressure  of  the  trade  unions  for  shorter 
working  days,  or  for  more  holidays  or  half -holidays,  will 
not  be  successfully  resisted. 

Turning  now  from  theory  to  fact,  we  find  that  there 
has  been  a  great  improvement  in  the  condition  of  labor 
in  this  respect.  At  the  beginning  of  the  nineteenth  cen- 
tury the  almost  universal  working  day  was,  as  McMaster 
tells  us,  from  sun  to  sun.  As  factories  grew  up  the  hab- 
its of  agricultural  labor  were  carried  over  into  industrial 
occupations,  and  working  days  of  16  and  18  hours  were 
not  uncommon.  In  1903  the  average  length  of  the  work- 
ing day  in  the  United  States  was  9.6  hours.  This  great 
reform  may  fairly  be  credited  to  the  efforts  of  labor  or- 
ganizations themselves,  for  without  their  insistence  and 
struggles  it  is  unlikely  that  it  would  have  been  volun- 
tarily granted  by  employers. 

Restriction  of  Output 

The  limitation  of  output  results  almost  necessarily 
from  the  above-mentioned  practices  of  the  unions.  Re- 
duction of  hours,  prohibition  of  piecework,  and  the  stand- 
ardization of  wages  all  tend  to  restrict  the  output  of  the 
individual  worker.  But  some  of  the  unions  have  gone 
further  and  have  directly  limited  the  amount  that  could 
be  produced  during  a  given  period  by  the  laborer.  This 
has  been  particularly  true  of  British  unions  and  is  the 
subject  of  common  complaint  by  English  employers  and 
writers,  but  illustrations  may  easily  be  found  in  the 
United  States. 

In  Chicago  in  1900  the  lathers  limited  a  day's  work  to  twenty- 
five  bundles  of  lath,  for  which  they  received  $3;  they  had 
formerly  done  thirty-five  bundles  for  a  daily  wage  of  $1.75. 


Labor  Organizations  111 

Plasterers  were  limited  to  thirty  square  yards  a  day ;  the  steam 
fitters  were  permitted  to  lay  only  ninety  feet  of  steam  pipe  per 
day^  but  the  plumbers  had  the  most  objectionable  rules  and 
restricted  materially  the  amount  of  work  that  could  be  done 
in  a  day. 3 

These  rules  were  defended  by  the  unions  on  the  ground 
that  they  were  necessary  in  order  to  secure  careful  work 
and  to  prevent  the  "rusher"  from  setting  the  pace  for  a 
fair  day's  w^ork. 

The  practice  has  not  been  uncommon,  especially  in  the 
sweated  trades,  for  an  unscrupulous  employer  to  pay  a 
few  particularly  able  workmen  to  put  extra  speed  into 
their  work  and  so  set  a  pace  that  the  other  workmen 
would  be  compelled  to  maintain.  This  was  especially  ob- 
jected to  by  the  unions  in  the  case  of  team  work.  They 
claimed  that  when  all  the  workmen  had  come  up  to  the 
new  standard,  particularly  in  piecework,  the  wages  were 
reduced  so  that  even  by  working  at  the  higher  rate  of 
speed  they  could  only  make  a  fair  wage.  One  of  the  rules 
of  the  Chicago  carpenters'  union  provided  that  ''any 
member  guilty  of  excessive  work  or  rushing  on  any  job 
shall  be  reported  and  shall  be  subject  to  a  fine  of  $5." 

Whatever  the  excuse  it  is  clear  that  such  limitations 
cannot  be  economically  justified.  Not  only  does  such 
dawdling  undermine  the  industrial  efiiciency  of  the 
worker,  but  it  is  unfair  to  the  employer.  If  the  latter 
bargains  for  the  union  rate  of  wages  and  the  normal 
working  day,  he  is  entitled  to  a  full  return  of  the  labor- 
er's best  efforts.  Otherwise  there  is  no  fairness  in  col- 
lective bargaining.     "So  far  as  labor  leaders  are  con- 

3  Bogart,  The  Chicago  Building  Trades  Dispute  (Political  Science  Quar- 
terly), Vol.  XVI.,  p.  134;  Commons,  Trade  Unionism  and  Labor  Prob- 
lems, p.  107. 


112  Business  Economics 

cerned,"  said  Mr.  John  Burns,  the  English  trade  union- 
ist, "we  are  all  strongly  opposed  to  the  restriction  of  pro- 
duction; we  are  all  in  favor  of  better  and  more  con- 
scientious work." 

Laboring  men  have  never  been  quite  able  to  divest 
themselves  of  their  old  antipathy  to  labor-saving  ma- 
chinery. They  generally  regard  the  introduction  of  a 
new  machine  as  a  displacer  of  men,  a  creator  of  unem- 
ployment, a  depresser  of  wages.  Some  unions  have  suc- 
cessfully resisted  the  introduction  of  machinery  into  their 
trades,  as  the  stone  cutters  in  Chicago,^  but  in  general 
they  have  recognized  the  impossibility  of  this  attitude. 
They  now  demand  that  when  machinery  is  introduced 
it  shall  be  operated  by  union  men  and  their  wages  shall 
be  fixed  so  as  to  give  the  workers  a  share  of  the  increased 
production. 

Fraternal  Benefits  of  Labor  Unions 

The  policies  and  methods  of  the  trade  unions  thus  far 
discussed  are  those  of  a  militant  nature,  but  the  fraternal 
objects  of  these  associations,  though  less  conspicuous, 
are  none  the  less  important.  Labor  organizations  gen- 
erally have  insurance  and  benefit  features,  by  which  sick, 
injured,  or  unemployed  members  are  assisted.  This  is 
particularly  true  of  the  English  organizations,  which 
developed  these  features  before  the  rise  of  the  militant 
new  unionism.  They  often  possess  large  funds  and  have 
been  rendered  thereby  more  conservative  and  responsi- 
ble. The  educative  effect  of  trade  unionism  among  the 
members  is  marked;  some  of  them  possess  libraries  and 
all  of  them  promote  discussion  and  thought  upon  eco- 

4  Bogart,  The  Chicago  Building  Trades  Dispute  (Political  Science  Quar- 
terly), Vol.  XVI,  p.  137. 


Labor  Organizations  113 

nomic  problems,  while  the  administration  of  their  affairs 
often  gives  valuable  training.  The  older  unions  did 
much  to  encourage  co-operation  among  their  members, 
but  today  the  tendency  is  to  limit  their  activities  to  the 
essential  one  for  which  they  are  organized,  namely,  col- 
lective bargaining. 

Collective  Baegaining 

Intelligent  unionists  realize  that  they  can  secure  the 
various  objects  for  which  they  strive  only  by  substituting 
collective  bargaining  for  contracts  between  employers 
and  individual  laborers.  Where  this  plan  is  accepted  by 
employers,  representatives  of  the  two  sides  agree  upon 
wage  scales,  usually  for  a  year;  during  this  period  the 
chief  task  of  union  officials  is  to  see  that  the  agreement 
is  lived  up  to,  and  if  possible  to  add  to  their  membership 
and  strengthen  the  union.  In  the  United  States  rela- 
tively few  trades  have  adopted  this  method  as  a  general 
practice,  the  employers  still  being  able  to  dictate  wages 
and  conditions  of  employment  in  most  of  them,  while  the 
unions  are  still  struggling  for  recognition,  if  not  for  ex- 
istence. In  refusing  to  make  collective  bargains  with 
the  unions,  employers  insist  that  as  they  run  all  the  risks, 
they  must  be  permitted  to  manage  their  business  as  they 
see  fit  and  without  interference  from  the  business  agent 
of  the  union.  In  reply  the  unions  insist  that  hours, 
wages,  and  conditions  of  employment  are  as  much  their 
business  as  that  of  the  employer.  The  latter  also  urges 
that  the  trade  unions  as  at  present  organized  are  too  irre- 
sponsible and  that  before  they  ask  for  collective  bargain- 
ing they  should  be  incorporated,  so  that  they  could  be 
sued  for  breach  of  contract  if  guilty  of  such.  As  yet, 
however,  the  unions  have  preferred  their  present  position 
of  irresponsibility  and  immunity  and  have  almost  in- 


114  Business  Economics 

variably  refused  to  be  incorporated.    President  Hadley, 
of  Yale,  writes :  ^ 

Strikes  and  Lockouts 

In  the  minds  of  a  large  section  of  the  public,  labor  unions  are 
chiefly  associated  with  strikes.  It  is  believed  by  many  who 
ought  to  know  better,  that  such  organizations  exist  for  the  pur- 
pose of  striking,  and  that  if  the  organizations  were  suppressed, 
industrial  peace  would  be  secured.  The  first  of  these  ideas  is 
a  distorted  one ;  the  second  is  wholly  unfounded. 

Strikes  are,  however,  a  necessary  concomitant  of  col- 
lective bargaining.  If  the  representatives  of  a  union  can- 
not come  to  terms  with  an  employer,  they  may  compel 
their  members  to  refuse  to  sell  their  commodity,  labor; 
such  a  concerted  refusal  to  work  is  a  strike.  The  right 
to  quit  work  has  been  regarded  as  a  sacred  one  by  trade 
unionists,  but  it  involves  social  consequences  of  great 
importance.  For  the  Avorkingman,  it  means  loss  of  wages 
and  demoralizing  idleness ;  to  the  employer,  idle  capital, 
loss  of  profits,  and  depreciation  of  plant ;  and  to  the  con- 
suming public,  inconvenience  and  annoyance  together 
with  curtailed  production.  Quite  aside  from  all  acts  of 
violence  and  lawlessness,  by  which  they  are  too  often 
accompanied,  there  is  involved  an  enormous  money 
waste.  According  to  a  report  of  the  Department  of  La- 
bor, losses  from  strikes  and  lockouts  in  the  United  States 
from  1881  to  1900  amounted  to  $449,342,000,  or  an  aver- 
age loss  per  establishment  of  about  $3,500. 

Conciliation  and  Arbitration 

The  public  is  awakening  to  the  realization  that  it  suf- 
fers the  greatest  injury  as  the  innocent  third  party  to 

5  Economics,  p.  353. 


Labor  Organizations  115 

every  industrial  dispute,  and  it  is  insisting  that  the  indus- 
trial peace  be  kept  or  more  reasonable  methods  of  settling 
differences  be  found  than  a  strike  or  lockout.  Such  a 
method  is  found  in  conciliation  and  arbitration.  In  the 
older  and  more  strongly  organized  unions  strikes  are  in- 
frequent and  methods  of  joint  discussion  and  agreement 
are  increasingly  resorted  to.  Boards  of  conciliation  are 
often  provided  for,  which  endeavor  by  means  of  confer- 
ence and  concession  to  prevent  a  dispute  from  arising; 
they  succeed  best  where  both  employers  and  employes 
are  organized.  Should  the  dispute  come  to  a  head,  how- 
ever, provision  is  usually  made  for  its  reference  to  a 
board  of  arbitration,  which  may  be  selected  by  the  dis- 
putants themselves  or  may  be  created  by  the  state ;  in  the 
latter  case  the  acceptance  of  the  award  may  be  voluntary 
or  compulsory. 

In  the  United  States  most  of  the  successful  boards  have 
been  those  selected  by  the  parties  to  the  disjuite;  the  state 
boards  have  usually  the  power  only  of  investigating  the 
causes  of  the  trouble,  but  this  in  itself  has  proved  of  con- 
siderable value  in  more  than  one  instance,  notably  in  the 
case  of  the  Anthracite  Coal  Commission.  Compulsory 
arbitration  is  being  given  a  thorough  trial  in  Australasia 
and  seems  to  be  meeting  with  success  there.  In  this  coun- 
try, however,  the  trade  unions  are  strongly  opposed  to 
compulsory  or  enforced  governmental  arbitration.  Writ- 
ing of  Great  Britain,  Mr.  and  Mrs.  Webb  assert  that  the 
principle  of  arbitration,  having  been  found  inconsistent 
with  collective  bargaining,  is  fast  going  out  of  favor.  It 
would  seem  from  the  experience  of  both  England  and  the 
United  States  that  the  chief  virtue  in  these  methods  lies 
in  the  habit  of  joint  conference  of  the  representatives  of 
labor  and  capital  and  the  resulting  conciliation. 


116  Business  Economics 

TEST  QUESTIONS 

1.  Why  have  labor  organizations  grown  more  rapidly  in  the 
United  States  and  England  than  on  the  continent  of  Europe  ? 

2.  What  are  the  two  types  of  trade  unions  that  prevail  in 
the  United  States? 

3.  What  were  the  essential  features  of  the  Knights  of  Labor? 
What  caused  the  downfall  of  this  organization? 

4.  What   are   the   essential   characteristics   of   the   American 
Federation  of  Labor? 

5.  By  what  methods  do  labor  organizations  attempt  to  control 
the  labor  market  ? 

6.  Why  do  labor  leaders  generally  object  to  piece,  premium, 
and  bonus  systems  of  wage  payment? 

7.  What  arguments  are  put  forth  by  the  trade  unionists  in 
favor  of  shorter  hours? 

8.  Give    illustrations    showing    where    unions    have    directly 
limited  the  amount  of  output. 

9.  What  are  some  of  the  chief  benefits  which  labor  unions 
attempt  to  secure  for  their  members? 

10.  What  is  the  attitude  of  a  great  many  employers  in  the 
United  States  toward  collective  bargaining? 

11.  For  what  reasons  does  labor  occasionally  resort  to  strikes 
and  lockouts?    How  can  strikes  and  lockouts  be  prevented? 

12.  Describe  the  method  of  settling  an  industrial  dispute  by 
conciliation. 


CHAPTER  IX 
woman  and  child  labor 

Eakly  Origin 

While  women  and  children  have  always  assisted  in  the 
work  of  the  home,  it  was  not  until  the  development  of  the 
factory  system  that  they  began  to  work  for  wages  out- 
side of  the  family.  From  the  earliest  days  the  prepara- 
tion of  food,  spinning  and  weaving  and  making  up  of 
garments,  and  other  branches  of  domestic  economy  had 
been  the  peculiar  tasks  of  the  housewife.  With  the  re- 
moval of  the  textile  industries  from  the  home  to  the  fac- 
tory and  the  invention  of  light-running  machinery,  many 
women  followed  them  and  employment  was  found  also 
for  young  children.  Thus  with  the  inception  of  the  mod- 
ern factory  system  and  machine  production  there  arose 
the  problem  of  woman  and  child  labor.  In  England  the 
evils  of  the  early  factory  system  were  incredibly  bad. 
Professor  Walker  wrote :  ^ 

The  beginning  of  the  present  century  found  children  of  five, 
and  even  of  three  years  of  age,  in  England,  working  in  factories 
and  brickyards ;  women  working  underground  in  mines,  harnessed 
with  mules  to  carts,  drawing  heavy  loads ;  found  the  hours  of 
labor  whatever  the  avarice  of  individual  mill  owners  might  ex- 
act, were  it  thirteen,  or  fourteen,  or  fifteen ;  found  no  guards 
about  machinery  to  protect  life  and  limb ;  found  the  air  of  the 
factory  fouler  than  language  can  describe,  even  could  human 
ears  bear  to  hear  the  story. 

1  Political  Economy,  p.  381. 

117 


118  Business  Economics 

Conditions  were  never  so  bad  in  this  country  as  in  Eng- 
land, owing  to  the  later  development  of  the  system  and 
prompter  legislation  against  its  evils,  and  especially  to 
the  scarcity  of  labor  which  compelled  employers  to  make 
the  conditions  of  labor  more  attractive. 

The  Field  of  Employment 

The  field  of  employment  for  women  has  been  a  con- 
stantly expanding  one.  '\Mien  Miss  Harriet  Martineau 
visited  the  United  States  in  1840  she  found  only  seven, 
occupations  generally  followed  by  women :  teaching,  nee- 
dlework, keeping  boarders,  work  in  the  cotton  mills,  type- 
setting, bookbinding,  and  domestic  service.  Since  that 
time  the  area  has  widened  until  there  is  scarcely  an  oc- 
cupation in  which  women  are  not  found  except  those 
closed  to  her  by  law  or  by  physical  inability.  The  num- 
ber of  females  10  years  of  age  and  over  engaged  in  gain- 
ful occupations  was  2,647,000  in  1880,  or  14.7  per  cent 
of  the  total  female  population;  this  number  more  than 
trebled  in  the  next  thirty  years,  being  8,075,772  in  1910, 
or  23.4  per  cent  of  all. 

The  largest  number  employed  was  in  domestic  and 
personal  service,  and  next  to  tliat  in  manufacturing  and 
mechanical  pursuits,  though  even  in  that  branch  they 
were  most  numerous  in  the  traditional  branches  of  wom- 
an's work,  as  dressmakers,  seamstresses,  etc.  It  is  nev- 
ertheless in  the  manufacturing  industries  that  the  most 
serious  evils  connected  w^itli  woman  and  child  labor  are 
found.  The  problems  differ  greatly  in  different  sections 
of  the  United  States.  In  the  Atlantic  states  the  greatest 
proportion  of  women  as  compared  with  men  find  employ- 
ment and  give  rise  to  special  problems  of  women 's  work ; 
in  the  South  child  labor  is  more  conspicuous,  while  in 


Woman  and  Child  Labor  119 

the  West  both  woman  and  child  labor  are  of  relatively 
small  importance. 

Effect  of  Woman  Labor  upon  the  Occupations  of  Men 

An  interesting  question  suggests  itself  at  this  point: 
Is  the  increase  in  the  employment  of  women  at  the  ex- 
pense of  men?  Are  the  women  crowding  the  men  out  of 
their  occupations  and  taking  their  places?  At  first  in- 
spection the  statistics  of  occupations  would  seem  to  lead 
to  an  affirmative  answer,  for  the  percentage  of  women 
breadwinners  increased  from  13.5  per  cent  in  1880  to 
17.6  per  cent  in  1910,  while  that  of  the  men  fell  from  80 
to  76.8  per  cent,  and  that  of  the  children  remained  about 
the  same.  The  cause  of  the  change  in  the  proportion  of 
the  sexes  was  not  due,  however,  to  any  falling  off  in  the 
number  of  men,  but  to  the  great  influx  of  women  into  the 
ranks  of  wage-workers.  In  some  lines  of  emplojTiient,  like 
those  of  bookkeepers,  stenographers,  typewriters,  clerks, 
etc.,  there  has  undoubtedly  been  an  encroachment  and 
men  have  been  displaced.  But  on  the  other  hand  many 
occupations  have  been  opened  to  men  during  the  last  fifty 
years  that  were  unkno^\Ti  before,  such  as  the  expanding 
fields  of  railroad  construction  and  operation,  the  steel 
industry,  the  utilization  of  electricity,  and  other  similar 
lines.  In  most  of  these  the  muscular  effort  involved  or 
the  character  of  the  work  has  kept  women  out,  but  in 
other  lines  Avhere  special  rapidity  or  lightness  of  touch 
are  required  the  women  outnumber  the  men,  as  in  the 
manufacture  of  cotton  goods,  hosiery,  hats  and  caps,  etc. 

The  development  and  improvement  of  machinery  has 
of  course  favored  the  employment  of  women.  Mr.  John 
A.  Hobson  -  asserts  that  **in  modern  machinery  a  larger 
and  larger  amount  of  inventive  skill  is  engaged  in  ad- 

2  Evolution  of  Modern  Capitalism,  p.  297. 


120  •  Business  Economics 

justing  macliine-tendiiig  to  the  physical  and  mental  ca- 
pacity of  women  and  children."  He  concludes  that  if 
the  exploitation  of  these  forms  of  cheap  labor  had  not 
been  prevented  by  factory  legislation  and  by  public  dis- 
approval, "the  great  mass  of  the  textile  factories  of  this 
country  [England]  would  have  been  almost  entirely 
worked  by  women  and  children."  As  a  matter  of  fact 
one  of  the  reasons  for  the  great  expansion  of  woman  la- 
bor in  the  United  States  as  well  as  in  England  is  because 
it  has  been  found  cheaper  than  man's  labor.  We  are 
thus  brought  face  to  face  with  a  fundamental  question 
in  the  discussion  of  the  problem :  Why  are  women  paid 
lower  wages  than  men? 

Wages  of  Women 

As  to  the  fact  there  is  no  doubt ;  one  comparison  taken 
from  the  census  of  1900  will  be  sufficient  to  illustrate  it. 
The  annual  average  earnings  of  men  in  mechanical  and 
manufacturing  industries  were  $490  and  of  women  $272 
per  annum.  The  more  important  question  is  why  this 
difference  exists.  A  number  of  reasons  suggest  them- 
selves at  once.  In  the  first  place  women  are  less  efficient 
than  men  and  produce  less ;  hence  they  are  paid  less.  In 
some  industries,  particularly  those  requiring  physical 
strength,  women  cannot  compete  successfully,  and  those 
are  usually  the  highest  paid  employments.  Other  well- 
paid  industries  are  regarded  by  men  as  essentially  their 
own  and  social  pressure  is  applied  to  keep  women  out. 
Then,  too,  woman's  ambition  to  attain  industrial  ef- 
ficiency is  not  so  great,  owing  to  her  expectation  of  mar- 
riage and  release  from  industrial  life.  Women  are  more 
often  absent  from  work,  owing  to  sickness  and  domestic 
claims  upon  their  time;  this  irregularity  of  employment 
tends  to  reduce  their  efficiency.    But  even  in  employments 


Woman  and  Child  Labor  121 

where  the  efficiency  of  men  and  women  is  admittedly 
equal,  the  women  receive  lower  wages  in  the  majority  of 
cases.  According  to  a  report  of  the  Bureau  of  Labor,  in 
80  out  of  100  cases  where  the  women  did  the  same  work 
as  the  men  and  did  it  as  well,  they  received  lower  wages 
than  the  men.  This  leads  to  the  consideration  of  a  second 
group  of  causes,  which  have  to  do  with  woman's  standard 
of  living. 

One  reason  why  she  receives  less  is  because  she  is  able 
and  willing  to  live  on  less.  Physiologically,  Dr.  Atwater 
has  said  that  man  needs  one-fifth  more  nutriment  than 
woman.  Women's  wages  are  less  because  of  their  some- 
what lower  cost  of  subsistence.  But  even  aside  from  this 
fact,  the  frequent  partial  dependence  of  women  upon 
other  members  of  their  family  for  support  makes  them 
willing  to  accept  less  and  consequently  reduces  their 
wages.  The  average  American  workingwoman  is  young, 
only  about  twenty-two  and  a  half  years  old,  and  after  the 
age  of  twenty-five  is  reached  the  number  declines  rapidly. 
That  is  to  say,  working  girls  regard  their  employment 
as  a  temporary  affair,  remaining  only  about  five  years,  on 
the  average,  in  the  store  or  factory ;  during  this  time  they 
often  live  at  home  with  their  parents  and  are  content  to 
receive  a  wage  much  smaller  than  a  man  would  require 
as  head  of  a  household. 

The  third  reason  is,  however,  the  most  important,  be- 
cause it  explains  at  the  same  time  the  low  economic  posi- 
tion which  woman  occupies  in  the  industrial  world.  The 
narrowing  of  the  field  within  which  women  can  readily 
find  employment  has  the  effect  of  greatly  intensifying 
the  competition  within  that  field.  There  is  also  a  great 
reserve  army  of  potential  women  wage-earners,  whom  a 
slight  increase  of  wages  or  force  of  circumstances — loss 
of  employment  by  the  male  members  of  the  family — will 


122  Business  Economics 

bring  into  the  field  as  competitors.  There  is,  in  other 
words,  a  constant  over-supply  of  labor  in  most  women's 
industries,  which  does  not  exist  in  any  men's  industries 
except  the  most  unskilled. 

Women  exhibit,  furthermore,  a  comparative  lack  of 
mobility  from  one  industry  to  another,  as  well  as  from 
one  locality  to  another.  According  to  Professor  Smart, 
Avomen  are  so  unready  to  leave  home  that  their  pay  on 
one  side  of  narrow  Scotland  is  50  per  cent  lower  than 
that  on  the  other  side. 

In  the  same  way,  the  flow  of  labor  from  one  occupation 
to  another,  which  tends  to  equalize  the  advantages  and 
rates  of  pay  of  different  emplojnnents,  is  far  feebler 
among  women  than  among  men. 

Finally,  there  is  little  organization  among  women. 
Their  individualistic,  almost  jealous,  attitude  to  one  an- 
other prevents  their  combination  and  united  action,  while 
their  submissive  acceptance  of  what  is  offered  leads  to 
apathy.  They  have  only  infrequently  formed  unions  and 
endeavored  to  substitute  collective  bargaining  for  indi- 
vidual action.  Women  are  therefore  industrially  in  much 
the  same  situation  as  unskilled,  unorganized  male  labor- 
ers, and  the  remedy  in  both  cases  would  seem  to  be  the 
same — education  and  organization. 

The  Effects  of  Woman  Labor 

The  presence  of  a  large  supply  of  cheap  woman  labor 
undoubtedly  has  a  depressing  effect  upon  men's  wages, 
and  consequently  upon  the  standard  of  life  of  the  whole 
laboring  class.  George  Gunton  ^  is  authority  for  the 
statement  that  ''in  proportion  as  the  wife  and  children 
contribute  to  the  support  of  the  family  the  wages  of  the 

3  Wealth  and  Progress,  p.  171. 


Woman  and  Child  Labor  123 

father  are  reduced."  The  family  wage  tends  to  remain 
the  same  whether  it  is  earned  by  the  father  alone  or  by 
the  father  with  the  assistance  of  his  wife  and  children. 
It  is,  however,  not  quite  clear  in  most  cases  whether  the 
men's  wages  are  low  because  the  women  and  children 
work,  or  w^hether  the  women  and  children  work  because 
the  men's  wages  are  low.  It  may  fairly  be  concluded, 
however,  that  the  evil  effects  of  low  wages  for  women  are 
not  confined  to  themselves  but  are  felt  by  all  with  whom 
they  come  in  competition. 

Readjustment  of  Woman's  Work 

What  conclusion  shall  we  draw,  then,  in  view  of  all 
these  facts,  as  to  the  desirability  of  employing  of  wom- 
en? The  fact  of  their  low  wages  and  industrial  depend- 
ence is  not  sufficient  to  lead  one  to  condemn  it.  These  are 
transitional  phenomena  and  can  be  remedied.  Women 
have  always  worked — on  the  farm,  in  the  homo,  and  in 
making  household  supplies.  When  this  work  was  taken 
over  by  the  factory,  woman  became  a  wage-worker  in 
the  modern  sense. 

The  census  records  in  respect  to  the  labor  of  women,  there- 
fore, read  in  the  light  of  collateral  facts,  are  a  history  of  indus- 
trial readjustment  rather  than  a  record  of  the  relative  extent 
of  the  employment  of  women,  and  it  is  impossible  to  say,  so  far 
as  the  census  figures  are  concerned,  whether  a  larger  proportion 
of  women  are  actively  engaged  in  labor  today  than  formerly  or 
not.  The  one  fact  which  is  clear  is  that  factory  or  shop  work 
is  displacing  home  work,  and  that  this  readjustment  of  indus- 
trial conditions  is  leading  to  the  employment  of  women  outside 
the  home  in  constantly  increasing  numbers.^ 

4  Report  of  Industrial  Commission,  Vol.  XIX,  p.  926. 


124  Business  Economics 

The  effect  of  this  readjustment  has  been  to  increase 
greatly  the  production  of  wealth.  The  production  of 
household  supplies  was  removed  from  the  family  to  the 
factory  when  it  was  handed  over  to  machinery  and  done 
better  and  more  cheaply.  If  the  work  of  women  thus 
released  were  expended  for  no  useful  purpose,  society 
would  gain  only  in  the  increased  leisure  of  the  Avomen, 
But  if  these  then  took  up  other  new  lines  or  set  men  free 
from  old  employments  so  that  they  could  turn  to  still 
different  ones,  then  the  production  of  goods  could  be 
greatly  increased.  Mr.  George  L.  Bolen  ^  writes  on  tliis 
point  as  follows : 

Without  women's  help  their  work  in  stores  and  offices  would 
be  done  by  men  taken  from  other  employment.  The  latter 's 
present  work  would  have  to  be  stopped  to  that  extent,  lessening 
the  quantity  of  goods  produced  by  men.  The  effect  would  be 
the  same  as  if  a  farmer  had  to  stop  plowing  two  hours  before 
noon  to  go  to  the  house  and  cook  his  dinner.  *  *  *  Women 
behind  the  counter,  and  at  the  typewriter,  release  men  for  work 
that  women  cannot  do. 

From  the  standpoint  of  woman  herself,  industrial  in- 
dependence must  be  regarded  as  a  great  gain.  Set  free 
from  the  necessity  of  contracting  marriage  for  the  sake 
of  a  home  and  of  depending  upon  mere  sex  attraction  to 
attain  that  end,  she  will  develop  her  capacities  more  fully 
and  when  she  does  enter  upon  marriage  will  do  so  as  a 
result  of  mutual  attraction.  The  entrance  of  women  into 
gainful  occupations  must  be  regarded  as  an  essential  step 
in  their  own  progress  and  the  improvement  of  society. 

Child  Labor 

Quite  different  must  be  our  attitude  towards  child  la- 
bor, which  can  only  be  condemned  as  a  waste  of  labor 

5  Getting  a  Living,  p.  475. 


Woman  and  Child  Labor  125 

power  and  as  stunting  the  development  of  the  children. 
The  census  of  1870  stated  for  the  first  time  the  number 
of  children  at  work  in  the  United  States;  there  were 
739,164  between  the  ages  of  10  and  15  years,  of  whom 
114,628  were  employed  in  manufactures.  During  the 
next  decade  the  number  increased  over  58  per  cent  to 
1,118,356  children  at  work  in  all  occupations.  The  dis- 
closure of  such  an  undesirable  tendency  called  forth  re- 
strictive legislation  in  most  of  the  states  and  the  number 
declined  materially  by  1890.  Since  1890  however  there 
has  been  a  reversal  of  this  tendency  back  to  the  condi- 
tions of  1880,  owing  chiefly  to  the  industrial  development 
of  the  South,  where  almost  no  factory  legislation  exists 
as  yet.  In  1910  there  were  1,990,225  children  at  work 
between  the  ages  of  10  and  15  years,  or  almost  one-fifth 
of  all  the  children  of  those  ages. 

In  the  South  Atlantic  states  the  proportion  of  childi-en 
at  work  is  especially  high,  reaching  58  per  cent  of  the 
boys  and  45  per  cent  of  the  girls  between  10  and  15  years 
of  age  in  South  Carolina. 

Evils  or  Child  Labor 

The  evils  connected  with  child  labor  are  the  long  hours 
— usuallj^  11  or  12  hours  a  day  where  no  restrictive  legis- 
lation exists — and  the  exhausting  and  often  dangerous 
work.  The  effect  of  monotonous  and  exhausting  toil  on 
the  health  of  the  children  before  their  muscles  are  set  and 
their  frames  knit  is  thoroughly  bad;  they  are  stunted 
and  deformed  and  prematurely  aged.  Many  of  the  occu- 
pations, too,  in  which  child  laborers  are  most  numerous 
are  dangerous  or  injurious,  as,  for  example,  tin  can  fac- 
tories, saw  mills,  paper  box  factories,  type  foundries,  and 
tobacco  establishments.  Second  only  to  the  physical 
effects  of  child  labor  is  the  mental  and  moral  injury  suf- 


126  Business  Economics 

fered  not  merely  by  the  ehilcl  but  also  by  society  in  de- 
priving these  youthful  laborers  of  a  thorough  education. 
"\Vliile  it  is  well  that  children  should  be  kept  busy,  there 
is  no  compensating  reward  either  in  money  wage  or  prep- 
aration for  adult  life  in  such  monotonous,  profitless 
drudgery. 

The  influence  of  the  competition  of  children  upon 
wages  is  depressing,  and  their  employment  indicates 
either  a  willingness  on  the  part  of  employers  and  parents 
to  exploit  this  cheap  and  defenseless  form  of  labor,  or  a 
backward  state  of  civilization.  Such  an  evil  can  be  cured 
only  by  determined  public  opposition,  by  the  passage  of 
laws  forbidding  all  labor  by  children  under  a  certain  age, 
say  15  (except  possibly  in  agricultural  work  or  house- 
work), compelling  school  attendance,  and  providing  for 
careful  inspection.  Most  of  all  is  needed  an  aroused 
public  conscience. 

Laboe  Legislation 

Labor  legislation  is  the  most  effective  method  of  im- 
proving the  conditions  of  emplo>Tnent,  and  to  a  consider- 
ation of  this  subject  we  must  devote  the  remainder  of  this 
section.  We  have  already  seen  that  the  fundamental 
principle  of  our  modern  wage  system  is  freedom  of  con- 
tract. This  is  guaranteed  in  our  federal  and  state  con- 
stitutions as  both  a  personal  and  a  property  right.  As 
a  result  of  this  fact  the  courts  have  generally  declared 
unconstitutional  any  legislation,  designed  to  protect  the 
interests  of  labor,  that  seemed  to  abrogate  this  freedom 
of  contract  or  that  savored  of  class  legislation.  Efforts 
to  improve  the  condition  of  labor  by  legislation  have 
therefore  met  with  especial  obstacles  in  this  country.  On 
the  whole,  however,  means  have  been  discovered  of  evad- 
ing these  constitutional  restrictions  when  it  has  seemed 


Woman  and  Child  Labor  127 

clearly  demanded  by  the  welfare  of  society,  and  the  his- 
tory of  labor  legislation  in  this  country  is  one  of  fairly 
steady  progress.  The  early  laws  were  practically  con- 
fined to  imprisonment  for  debt,  mechanics'  liens,  the 
hours  of  education  of  children  employed  in  factories,  and 
similar  matters.  Nothing  noteworthy  was  accomplished 
until  1866,  when  Massachusetts  passed  an  eight-hour  child 
labor  law  for  children  under  fourteen ;  in  1874  she  passed 
a  ten-hour  law  for  women  and  children  under  eighteen 
engaged  in  manufacturing  establishments,  and  in  1877 
enacted  the  first  factory  inspection  act,  an  idea  which 
has  since  been  copied  in  most  of  the  states  and  without 
which  mere  legislation  is  of  little  avail. 

Factory  Acts 

The  factory  acts  may  be  divided  into  two  classes:  (1) 
those  that  endeavor  to  secure  the  safe  or  healthful  man- 
ner of  conducting  a  business  and  (2)  those  that  attempt 
to  limit  the  occupations,  the  hours,  and  the  methods  of 
paying  the  workers.  Under  the  first  head  come  such 
matters  as  fire  protection,  ventilation,  guarding  of  ma- 
chinery, inspection  of  boilers  and  mines,  etc.  Such  legis- 
lation and  inspection  have  in  many  states  been  extended 
to  churches,  school-houses,  hotels,  theaters,  and  public 
buildings. 

The  second  group  includes  those  laws  which  are  usually 
meant  when  factory  acts  are  referred  to.  In  England 
there  has  been  a  very  steady  development  and  extension 
of  such  legislation,  beginning  in  1802,  when  Peel's  Act 
tried  to  limit  the  hours  and  time  of  work  of  pauper  ap- 
prentices in  the  cotton  mills;  this  was  extended  to  all 
young  people  in  textile  industries  in  1833,  to  women  in 
1844,  tlien  to  all  large  industries  in  1864,  and  to  smaller 
ones  in  1867,  and  finally  in  1878  these  various  provisions 


128  Business  Economics 

were  codified  into  a  complete  factory  act  regulating  the 
health  and  safety  of  the  laboring  people  generally. 

In  the  United  States  the  movement  was  considerably 
later  and  has  not  been  so  uninterrupted.  But  today  laws 
limiting  the  number  of  hours  of  labor  to  eight  for  all 
those  engaged  on  public  works  have  been  passed  by  the 
federal  government  and  by  most  of  the  states.  Attempts 
to  fix  the  hours  of  labor  of  adult  male  workers  have 
usually  been  declared  unconstitutional,  for  the  reasons 
stated  above,  except  in  especially  dangerous  or  unhealth- 
ful  establishments,  such  as  bakeries,  mines,  smelters,  and 
similar  lines.  Consequently  the  men  have  been  forced  to 
rely  largely  upon  their  own  efforts  for  the  redress  of 
industrial  grievances ;  in  this  fact  lies  one  explanation  of 
the  growth  and  strength  of  labor  organizations  in  this 
country. 

On  the  other  hand  legislation  in  behalf  of  women  and 
especially  children— wards  of  the  state — has  usually 
been  held  constitutional  by  the  courts  and  has  had  a  more 
extended  application.  More  than  half  of  the  states  of  the 
Union  have  regulated  the  length  of  the  working  day  for 
women  and  children.  The  tendency  now  is  to  limit  the 
working  day  for  women  to  eight  hours,  and  that  of  chil- 
dren to  even  less.  Child  labor  laws  limit  the  age  below 
which  employment  is  illegal,  usually  between  10  and  14 
years,  but  even  as  high  as  16  years.  Within  these  ages 
employment  may  be  allowed  only  in  exceptional  cases  by 
means  of  an  employment  certificate  or  permit.  A  few 
states  require  a  physical  and  mental  examination  of  the 
child  before  the  permit  will  be  issued.  There  is  a  ten- 
dency to  require  compulsory  schooling  of  some  kind  until 
the  age  of  16,  either  in  the  regular  schools  or  in  continua- 
tion schools.  All  this  labor  legislation  in  behalf  of  women 
and  children  is  based  upon  the  biological  and  ethical 


Woman  and  Child  Labor  129 

principles  of  the  conservation  of  human  resources  and 
the  perfection  of  the  race. 

Along  with  all  other  legislation  in  behalf  of  labor,  there 
is  a  tendency  to  regulate  the  periods  of  rest  for  working 
people,  both  for  their  own  welfare  and  the  safety  of 
society.  In  railroad  work  and  in  other  work,  a  maximum 
period  of  continuous  employment  is  pfescribed  and  a 
certain  period  of  rest  is  required  between  work  periods 
to  allow  the  workmen  to  recuperate.  This  movement  is 
still  further  emphasized  by  the  organized  efforts  for  one 
day  of  rest  in  seven.  Modern  industrial  organization 
does  not  permit  the  faithful  observance  of  the  Sabbath 
as  a  day  when  all  regular  toil  shall  cease.  The  one-day- 
of-rest-in-seven  laws  are  designed  to  give  every  work- 
man at  least  one  day  of  rest  in  each  week,  letting  that  day 
come  at  such  a  time  as  industrial  or  personal  convenience 
will  permit. 

Minimum  Wage  Legislation 

One  of  the  most  recent  tendencies  of  labor  legislation 
is  the  movement  in  behalf  of  minimum  wage  laws  for 
women  and  children.  The  example  for  such  a  law,  which 
was  set  by  Massachusetts  in  1911,  has  been  followed  by 
other  states  and  bids  fair  to  become  general.  These  laws 
vary  somewhat  in  character.  Usually  they  provide  for  a 
central  state  board  which  has  charge  of  the  enforcement 
of  the  law.  This  board,  either  alone  or  with  the  assistance 
of  a  local  board  made  up  of  representatives  of  employers, 
employes,  and  the  public,  determines  upon  a  fair  min- 
imum wage  in  each  of  the  industries  of  a  locality.  Some 
of  the  boards  have  merely  advisory  powers  and  depend 
upon  mediation,  publicity,  and  public  opinion  to  carry 
out  the  findings  of  the  commission,  while  others  have 
compulsory  administrative  powers  to  carry  out  their  or- 


130  Business  Economics 

ders,  with  the  aid  of  the  courts  if  necessary.  In  at  least 
one  case,  a  fixed  minimum  wage  has  been  prescribed  in 
the  statute.  The  tendency,  however,  seems  to  be  to  pro- 
vide a  board  with  large  discretionary  administrative 
powers. 

These  minimum  wage  laws  are  based  upon  the  prin- 
ciple that  an  industrial  worker  is  entitled  to  a  fair  living 
wage.  The  justice  of  such  a  claim  cannot  be  gainsaid. 
The  question  of  what  shall  be  done  with  those  incapable 
of  earning  the  minimum  wage,  either  because  of  deficien- 
cies in  training  or  physical  disabilities,  is  a  serious  one. 
It  can  probably  be  solved  by  allowing  exceptions  to  the 
law  and  wise  administrative  discretion  in  its  enforce- 
ment. In  general  we  may  conclude  that  by  the  passage 
of  such  legislation,  society  has  definitely  decided  that 
there  are  some  conditions  of  employment  which  cannot 
safely  be  left  to  free  contract  or  to  collective  bargaining 
between  employer  and  employe,  but  must  be  regulated  by 
society  itself  on  the  broad  grounds  of  social  welfare. 

TEST  QUESTIONS 

1.  What  were  some  of  the  early  origms  of  woman  and  child 
labor? 

2.  What  evils  were  connected  with  the  early  factory  system 
in  England? 

3.  Are  the  women  crowding  the  men  out  of  their  occupations 
and  taking  their  places? 

4.  What  are  the  most  important  reasons  for  woman's  low 
wages  in  modern  industry? 

5.  How  does  Mr.  Bolen  justify  the  employment  of  women  ? 

6.  What  are  the  chief  evils  of  child  labor? 

7.  Into  what  two  classes  may  the  factory  acts  be  divided? 

8.  Why  has  the  movement  for  enlightened  labor  legislation 
been  slower  in  the  United  States  than  in  most  European  coun- 
tries? 


Woman  and  Child  Labor  131 

9.  "What  are  some  of  the  most  common  features  of  child  labor 
legislation  ? 

10.  What  are  the  essential  characteristics  of  the  minimum 
wage  legislation  for  women? 

11.  What  evidence  may  be  cited  in  proof  of  the  contention  that 
the  modern  woman  labor  problem  is  chiefly  a  matter  of  the  read- 
justment of  woman's  work? 

12.  What  biological  and  social  questions  are  involved  in  woman 
labor? 

13.  Why  have  the  courts  been  more  liberal  in  the  construction 
of  laws  regulating  the  labor  of  women  and  children  than  in  the 
interpretation  of  the  laws  regulating  the  labor  of  men  ? 

14.  What  is  the  significance  of  the  one-day-of-rest-in-seven 
movement? 


CHAPTER  X 
unemployment  and  insurance 

Extent  of  Unemployment 

The  greatest  problem  in  modern  industry,  as  well  as 
the  greatest  curse  to  the  laboring  classes,  is  unemploy- 
ment. Wliile  unemployment  has  always  existed  under 
all  systems  of  labor,  it  assumed  added  significance  when 
the  introduction  of  the  wage  system  threw  every  worker 
upon  his  own  resources  and  made  him  responsible  for 
the  care  of  himself  and  his  family.  Modern  industry  is 
sensitive  and  unstable,  and  its  delicate  mechanism  is 
very  likely  to  get  out  of  order;  credit  and  fashion,  to 
mention  no  others,  are  factors  that  make  for  instability, 
and  these  are  essentially  modern.  Professor  Marshall  is 
of  the  opinion  that  the  factory  system  has  not  increased 
inconstancy  of  employment,  but  has  simply  rendered  it 
plainer  by  localizing  it.  But  whether  more  or  fewer  than 
in  earlier  times,  the  number  of  the  unemployed  in  mod- 
ern industry  is  appallingly  great. 

It  is  not  easy  to  estimate  correctly  the  extent  and 
amount  of  this  evil  and  we  accordingly  find  considerable 
variations  in  the  statistical  presentations  of  fact.  In 
1885  two  investigations  of  the  amount  of  employment 
were  made,  one  by  Carroll  D.  Wright,  in  his  report  as 
United  States  Commissioner  of  Labor  for  1886,  and  the 
other  by  the  Massachusetts  Bureau  of  Labor  in  its  re- 
port for  1887.    Mr.  Wright  defined  the  unemployed  very 

132 


Unemployment  133 

narrowly  as  "those  who  under  prosperous  times  would 
be  fully  employed,  and  who,  during  the  time  mentioned, 
were  seeking  employment";  using  the  term  in  this  re- 
stricted sense,  he  concluded  that  71/0  per  cent  of  the 
working  population  engaged  in  manufacturing  and  me- 
chanical pursuits  and  trade  and  transportation  were  idle 
during  the  year,  which  moreover  he  considered  one  of 
extreme  depression.  The  Massachusetts  statistics,  on 
the  other  hand,  were  presented  as  indicative  of  general 
conditions  in  normal  years  and  may  safely  be  regarded 
as  such.  According  to  this  report,  30  per  cent  of  the  total 
number  of  breadwinners  in  the  state  had  been  unem- 
ployed at  their  principal  occupations  on  an  average  of 
4.11  months  in  the  year  covered;  some  of  these,  however, 
found  work  at  other  or  secondary  occupations.  But  the 
net  result  of  the  investigation  was  well  put  in  the  terse 
statement  of  the  report  that  "about  one-third  of  the 
total  persons  engaged  in  remunerative  labor  were  unem- 
ployed at  their  principal  occupation  for  about  one-third 
of  the  working  time."  At  the  lowest  estimate  the 
whole  working  population  lost  on  the  average  almost  one- 
tenth  of  their  working  time.  The  loss  of  such  a  propor- 
tion of  the  community's  productive  force,  with  all  the 
demoralization  attendant  upon  irreg-ular  or  no  labor,  is 
evidence  of  a  problem  of  grave  import. 

Classification  of  the  Unemployed 

Unemployment  is  such  a  broad  term  and  covers  so 
many  different  ideas  that  it  will  be  well  to  classify  the 
unemployed  before  proceeding  further.  They  may  be 
logically  divided  as  follows : 


134  Business  Economics 

I.     The  temporarily  unemployed 

a.  Those  certain  of  work  again    (efficient  workmen  tem- 

porarily  out   of  work,   owing  to  seasonal  variations, 
shut-downs,  etc.) 

b.  Those  without  such  a  prospect 

1.  Efficient  and  industrious  workmen  thrown  out  of  work 

by  change  in  fashion,  introduction  of  new  ma- 
chinery, foreign  competition,  prolonged  depres- 
sion, etc. 

2.  Those  whose  work  is  naturallj^  fluctuating  and  casual 

in  its  nature  (casual  day-laborers,  charwomen,  etc.) 
II.     The  permanently  unemploj^ed 

a.  The  "won't  works"  (like  tramps) 

b.  The  "can't  works"  (defectives  in  general) 

Such  a  classification  renders  much  easier  the  analysis 
both  of  the  causes  and  of  the  cure  of  unemployment. 

Causes  of  Unemployment 

The  first  question  that  presents  itself  in  any  discussion 
of  the  causes  of  unemplojTnent  is  whether  it  is  due  pri- 
marily to  personal  causes,  such  as  inefficiency  or  intem- 
perance, or  to  industrial  causes  over  which  the  individual 
has  no  control. 

Personal  causes  are  those  mental,  moral,  and  physical  defects 
which  show  themselves  either  in  the  inability  and  inefficiency  of 
the  workman  or  in  his  unwillingness  to  work.  Here  are  included 
all  the  varieties  of  personal  inaptitude,  ranging  from  idiocy,  in- 
temperance, and  vice,  to  old  age,  sickness,  and  accident.^ 

Such  a  comprehensive  definition  includes  many  cases, 
of  course,  where  no  blame  can  be  attached  to  the  indi- 
vidual, and  yet  each  one  of  these  causes  is  personal,  that 

1  Eeport  of  Industrial  Commission,  Vol.  XIX,  p.  746. 


Unemployment 


135 


is,  it  does  not  affect  at  the  same  time  a  whole  group,  as 
an  industrial  depression  would  do.  Persons  included  in 
this  group  are  always  on  the  margin  of  employment;  in 
bad  times  they  are  the  first  to  be  discharged  and  in  good 
times  they  are  the  last  to  be  employed.  Nor  is  the  cause 
of  their  lack  of  employment  always  easy  to  give ;  it  may 
be  itself  the  result  of  industrial  accident  or  unhealthful 
occupation,  or  the  result  of  heredity,  evil  habits  and  as- 
sociations, and  defective  education.  We  may  present  two 
tables  giving  brieflj^  the  causes  of  poverty  and  unemploy- 
ment. The  first  gives  the  causes  of  poverty  ascribed  by 
the  charity  organization  societies  of  New  York,  Boston, 
and  Baltimore  to  applicants  for  relief : 

Causes  of  Poverty 
charity  organization  society  records  ^ 


Cause 

Per  Cent 

Drink   

13.7 
7.5 
2.1 

Shiftlessness  and  ineflSciency 

Other  moral  defects  

Total,  Character   

23.3 

No  male  support 

5.0 
3.6 

Lack  of  other  normal  support 

Total,  Support    

8.6 

Lack  of  employment  

23.5 
8.1 
3.3 

Insufficient  employment 

Poorly  paid,  etc 

Total,  Employment 

34.9 

2  Warner,  American  Charities,  Eev.  Ed.,  p.  53. 


136 


Business  Economics 


Cause 

Peii  Cent 

Sickness  and  death  in  family 

Insanity  and  physical  defects 

21.1 
4.1 
3.9 
4.1 

Old  age 

Other  incapacity 

Total,  Incapacity   

33.2 

100. 

100. 

The  first  group  of  causes  indicates  misconduct  and  the 
last  group  indicates  misfortune ;  the  other  two  shade  off 
into  industrial  causes,  though  lack  of  employment — the 
largest  single  cause — may  in  turn  be  ascribed  to  any  one 
of  several  remoter  causes  according  to  the  bias  of  the  in- 
vestigator. This  table  is  a  record  of  the  causes  of  failure 
on  the  part  of  those  who  have  fallen  behind  or  dropped 
out  altogether  in  the  race  of  life.  At  the  other  end  of  the 
scale  stand  the  members  of  labor  organizations,  on  the 
whole,  the  elite  of  the  labor  world.  The  following  table 
gives  the  causes  of  unemplojinent  of  31,339  cases  at  the 
efid  of  September,  1900,  as  reported  to  the  New  York  Bu- 
reau of  Labor  Statistics : 

Causes  op  Idleness,  Members  op  Trade  Unions,  1900 


Cause 

Pek  Cent 

No  work      

75.5 

.5 

Strike  or  lockout 

13.0 

Sickness 

4.7 

1.6 

Other  causes     

4.7 

Total    

100.0 

Unemployment  137 

This  table  emphasizes  very  strongly  the  industrial 
causes  of  unemployment,  three-fourths  of  which  is  as- 
cribed to  lack  of  work.  In  some  cases,  as  among  the  iron 
and  steel  workers,  where  there  is  a  regular  two  months' 
shut-down  to  make  repairs,  and  in  the  building  trades, 
M^here  the  inclemency  of  the  weather  usually  prevents 
work  during  the  winter,  the  lack  of  employment  may  be 
regarded  as  a  vacation  rather  than  a  hardship,  for  the 
rates  of  pay  are  high  enough  during  the  remaining 
months  to  offset  those  of  idleness.  In  other  cases,  how- 
ever, as  in  coal-mining,  there  is  a  large  reserve  army  of 
workers  on  hand  and  employment  is  secured  from  only 
one-half  to  two-thirds  the  time.  In  1900,  when  the  aver- 
age number  of  days  of  employment  was  larger  than  it 
had  been  in  ten  years,  the  bituminous  miners  were  em- 
ployed only  234  days  and  the  anthracite  miners  only  166 
days  in  the  year.  This  indicates  a  very  bad  organization 
of  the  industry.  The  same  thing  was  formerly  true  of 
the  London  dockyards,  where  there  was  a  reserve  army 
of  some  4,000  surplus  workers.  Of  course  the  effect  of 
this  is  to  depress  wages.  The  clothing  trade  is  subject 
to  seasonal  fluctuations  and  the  caprice  of  fashion,  where- 
fore it  offers  very  irregular  employment. 

Machinery  and  improved  processes  were  frequently 
spoken  of  by  witnesses  before  the  Industrial  Commission 
as  the  leading  cause  of  unernployment.  If  the  general 
conditions  of  business  are  good  at  the  time  of  the  first 
introduction  of  machinery,  the  displaced  laborer  is  re- 
absorbed again  and  the  hardship  is  not  so  noticeable. 
But  if  it  coincides  with  a  period  of  business  depression, 
the  introduction  of  machinery  appears  to  be  the  cause  of 
a  large  displacement  of  labor,  which  might  more  truly  be 
ascribed  to  industrial  depression.  This  last  cause  is  re- 
sponsible for  enormous   suffering  among  the   laboring 


138  Business  Economics 

classes,  for  the  method  oftenest  resorted  to  by  industrial 
enterprises  to  reduce  expenses  is  the  wholesale  discharge 
of  laborers,  Avho  are  thus  made  to  bear  the  burden  of  in- 
dustrial disorganization.  This  was  well  illustrated  by 
the  economies  effected  by  the  railroads  in  the  year  1908, 
in  their  general  reduction  of  the  labor  force  and  of  wages. 
But  even  in  good  years  the  inconstancy  of  employment 
is  startling.  In  the  four  years  1897-1900  the  men  in  trade 
unions  in  New  York  State  lost  16.2  per  cent  of  their  time 
from  unemployment,  w^hich  is  almost  exactly  one  day  in 
every  week.  And  these,  it  must  be  remembered,  were 
skilled  and  efficient  workers  in  organized  trades.  Finally 
strikes  are  given  as  a  cause  of  unemplojonent  in  the  table ; 
these  are  a  peculiar  feature  of  modern  industry  and  do 
not  call  for  further  discussion,  except  to  point  out  that 
they  are  not  so  important  as  they  are  often  represented 
to  be. 

Remedies  for  Unemployment 

The  foregoing  analysis  of  the  causes  of  unemployment 
shows  that  they  are  deep-seated  in  the  nature  of  modern 
industry  and  that  it  would  be  unjust  to  the  workingman 
to  attribute  them  in  any  large  measure  to  his  incapacity 
or  indisposition  to  labor.  The  care  of  the  unemployable 
must  of  course  be  undertaken  by  society  in  order  that 
such  persons  may  be  prevented  as  far  as  possible  from 
depressing  the  wages  of  competent  labor  by  their  com- 
petition. Exceptional  periods  of  distress  may  and  should 
be  met  by  temporary  relief  measures.  But  what  we  may 
call  the  normal  unemployment  in  modern  industry,  which 
amounts  to  from  2  to  2i/o  per  cent  of  the  labor  force,  can- 
not be  overcome  by  direct  methods.  The  remedy  for  this 
lies  "in  a  better  organization  of  employers  and  employes, 
more  steady  expansion  of  trade,  and  greater  stability  of 


Unemployment  139 

industry  and  of  legislation  affecting  industry.  These  are 
not  directly  problems  of  unemployment,  but  rather  of 
taxation,  currency,  monopoly,  immigration,  overproduc- 
tion, and  technical  advances  in  industry.  Their  treat- 
ment must  be  undertaken,  not  primarily  as  measures  of 
providing  for  the  unemployed,  but  as  measures  for  im- 
proving the  conditions  of  business. " -"^ 

The  problem  of  unemployment  would  thus  seem  to  be  a 
permanent  one,  bound  up  in  the  very  nature  of  a  dynamic 
society ;  it  may  be  regarded  as  the  price  of  progress.  But 
the  question  may  fairly  be  raised  as  to  whether  the  labor- 
ing classes  should  foot  the  bill  or  whether  the  cost  might 
not  fairly  be  borne  by  society  as  a  whole.  This  has  sug- 
gested, as  a  solution  of  the  problem,  insurance  of  work- 
ingmen  against  unemployment,  a  discussion  of  which, 
however,  must  be  deferred  to  the  end  of  the  section. 
Some  methods  of  alleviation,  if  not  of  abolition,  of  the 
evils  of  unemployment  may  be  suggested.  Free  public 
employment  bureaus  and  agencies,  national  in  scope  and 
well  integrated,  would  do  much  to  secure  a  better  adjust- 
ment of  demand  and  supply  in  the  labor  market,  and  se- 
cure a  better  distribution  of  the  labor  force  and  greater 
mobility  of  labor.  To  prevent  the  loss  through  strikes 
and  lockouts,  better  organization  and  mutual  understand- 
ing on  the  part  of  both  employers  and  employes  is  needed. 
And  finally,  improved  industrial  and  technical  education 
is  essential,  whereby  the  loss  in  skill  through  the  intro- 
duction of  new  inventions  and  machinery  may  be  min- 
imized and  the  productivity  of  the  laboring  class  in- 
creased. 

Among  the  measures  of  relief  for  unemployment  due 
to  accident,  sickness,  and  old  age,  none  is  more  important 

3  Report  of  Industrial  Commission,  Vol.  XIX,  p.  757. 


140  Business  Economics 

or  more  deserving  of  a  hearing  in  the  United  States  than 
that  of  insurance  against  these  evils.  The  earnings  of 
the  average  male  wage-earner  are  so  small — half  of  the 
number  earn  annually  less  than  $436,  and  half  of  the 
adult  male  factory  workers  earn  less  than  $400  a  year — 
that  the  unemployment,  sickness,  disablement,  or  old  age 
of  the  breadwinner  must  throw  a  large  proportion  of 
families  so  afflicted  into  a  condition  of  periodic  poverty. 
Any  remedies  that  will  alleviate  the  miseries  caused  by 
fluctuations  in  employment,  industrial  accidents,  diseases 
incident  to  industry,  etc.,  deserve  a  respectful  hearing. 

Industrial  Accidents 

No  adequate  statistics  of  industrial  accidents  exist  in 
the  United  States,  but  a  recent  estimate  by  F.  L.  Hoff- 
man ^  gave  the  number  of  fatal  accidents  among  occu- 
pied males  in  1908  as  between  30,000  and  35,000.  An  an- 
alysis of  the  reports  of  the  New  York  Bureau  of  Labor 
Statistics  from  1901  to  1906  shows  that  of  the  total  num- 
ber (39,244)  of  industrial  accidents  reported  in  that  state 
a  little  over  2  per  cent  w^ere  fatal,  almost  17  per  cent  re- 
sulted in  permanent  disablement,  and  81  per  cent  resulted 
in  temporary  disablement.  More  than  half  of  the  acci- 
dents in  industry  are  the  result  of  machinery  in  motion. 
Mr.  Hoffman  calculates  that '  *  it  should  not  be  impossible 
to  save  at  least  one-third  or  perhaps  one-half  by  intelli- 
gent and  rational  methods  of  factory  inspection,  legisla- 
tion, and  control."  Prevention  of  accidents  rather  than 
compensation  to  the  workingman  after  they  occur  should 
be  the  aim  of  society,  in  order  to  avoid  the  wasteful  loss 
of  productive  power,  not  to  mention  the  suffering  and 
misery  entailed  by  such  accidents.    "Immunity,  not  com- 

4  Bulletin  of  United  States  Bureau  of  Labor,  Sept.,  1908,  p.  418. 


Unemployment  141 

pensation,"  has  been  the  demand  of  the  British  trade 
unions.  Of  first  importance  then  is  careful  factory  legis- 
lation, safeguarding  of  machinery,  and  factory  inspec- 
tion. 

Marked  advances  have  been  made  along  these  lines  as 
a  result  of  governmental  regulations  and  greater  co-oper- 
ation among  factory  inspectors,  employers,  and  em- 
ployes, and  as  a  result  accident  rates  have  been  very  much 
reduced  during  the  last  few  years.  A  strong  educational 
campaign  has  been  carried  on  by  state  labor  bureaus  and 
various  local  and  national  societies  as  well  as  by  em- 
ployers themselves  for  the  purpose  of  acquainting  all 
concerned  with  the  possibilities  of  safety  devices  until 
''safety  first"  has  become  a  popular  byword.  In  order 
to  make  even  greater  systematic  advances  along  this  line, 
the  liability  insurance  companies  in  1913  established  an 
Accident  Prevention  Bureau  for  the  purpose  of  studying 
scientifically  the  possibilities  of  accident  prevention  and 
making  this  information  available  for  all  concerned.  As 
a  result  of  these  appeals,  based  on  considerations  of 
humanity  and  economy,  great  strides  have  been  made  for 
the  prevention  of  industrial  accidents.  Industry  regards 
more  the  sacredness  of  human  life,  recognizes  the  waste 
in  crippling  or  killing  its  trained  workmen,  and  feels  the 
heavy  burden  of  accident  insurance  and  liability  awards. 

Legally  and  judicially  we  have  been  interested  pri- 
marily in  the  question  of  responsibility  and  compensa- 
tion. Until  recently  legislatures  and  the  courts  have 
taken  the  position  that  the  workinginan  was  responsible 
unless  he  could  prove  the  employer  responsible  for  his 
injury.  The  impossibility  of  such  proof  and  consequently 
the  untenability  of  such  a  position  are  clear  from  the  fol- 
lowing table,  compiled  by  the  German  Goverimient  for 
purposes  of  accident  insurance : 


142 


Business  Economics 


Accidents  in   German   Industries  Traceable  to  Different 

Causes 


Causes 

AGRICTTI.TUEIC 

(1891) 

INDTTSTBT 

(1887) 

Mining 
(1887) 

Fault  of  employer   

18.2 
24.4 
20.1 
2.8 
34.5 

19.8 

25.6 

4.4 

3.3 

46.9 

1.3 

Fault  of  injured  workman   .... 
Fault  of  both   

29.8 

Fault  of  third  person   

Unavoidable  or  indeterminable. 

4.3 
64.6 

Total  

100.0 

100.0 

100.0 

Causes  of  Accidents 

Statistics  from  both  Germany  and  Austria  show  that  a 
full  half  or  more  of  all  industrial  accidents  are  due  to 
causes  for  which  neither  employers,  injured  workmen, 
nor  fellow  employes  are  responsible,  but  which  are  inci- 
dental to  the  nature  of  the  industry  itself.  But  besides 
the  danger  of  injury  from  machinery,  there  are  numer- 
ous specially  dangerous  or  injurious  trades  in  which 
injury  by  poisoning,  disease,  etc.,  is  almost  unavoidable 
as  trade  processes  are  at  present  conducted.  These  have 
been  classified  as  follows:  trades  in  which  lead  is  a 
poisonous  element,  trades  which  produce  other  chemical 
poisons,  trades  in  which  lockjaw  is  an  incident,  trades  in 
which  the  danger  arises  from  injurious  particles  in  the 
air  or  from  dust,  processes  that  require  a  sudden  change 
from  heat  to  cold  and  vice  versa,  those  that  require  arti- 
ficial humidity,  and  trades  in  which  accidents  are  so  fre- 
quent as  to  demand  special  legislation.  Before  we  try  to 
decide  who  in  justice  should  bear  the  cost  of  sickness  or 
injury  arising  from  these  causes,  let  us  inquire  as  to  the 


Unemployment  143 

practice  in  the  United  States  and  in  other  countries,  so 
as  to  have  the  data  necessary  for  a  fair  conclusion. 

Employers'  Liability 

The  original  legal  doctrine  regarding  liability  for  acci- 
dent in  England  and  America,  which  until  recently  was 
practically  unmodified  in  the  latter  country,  was  based 
on  the  principle  of  individual  responsibility  for  acts  of 
negligence.  Briefly  stated  the  common-law  doctrine  is 
that  an  employer  must  provide  reasonably  safe  condi- 
tions of  employment  and  that  then  the  employe  assumes 
the  risks  incident  to  the  occupation  or  arising  from  the 
carelessness  of  fellow-servants;  moreover  even  if  the 
employer  has  been  remiss,  the  employe  cannot  collect 
damages  if  he  has  been  guilty  of  contributory  negligence. 
These  three  doctrines — assumption  of  risk,  doctrine  of 
the  fellow-servant,  and  contributory  negligence — have 
been  used  practically  to  free  the  employer  from  all  re- 
sponsibility in  cases  where  injured  employes  have  sought 
to  secure  damages.  Moreover,  as  has  been  shown  above, 
many  cases  exist  where  it  is  impossible  to  fix  the  blame 
on  either  employer,  employe,  or  a  third  party,  and  in 
such  cases  no  compensation  could  be  secured  for  injury 
under  the  law.  The  full  rigor  of  the  common  law,  which 
has  w^orked  out  so  unfairly  for  the  workingman  in  mod- 
ern machine  production,  has  been  modified  in  most  of  the 
states  by  statutes  defining  more  exactly  the  duties  of  the 
employer  and  repealing  the  fellow-servant  doctrine  in 
certain  lines  of  employment,  notably  in  railroad  work. 

Workmen  's  Compensation 

Under  the  common-law  doctrine,  compensation  for  in- 
dustrial accidents  had  to  be  sought  by  injured  workmen 
through  a  suit  for  damages  against  the  employer.    Re- 


144  Business  Economics 

covery  was  very  uncertain  for  the  workman  and  what  he 
did  recover  was  largely  consumed  in  legal  expenses.  In 
1906  and  again  in  1908  Congress  passed  a  federal  em- 
ployer's liability  act  limited  to  common  carriers,  which 
was  still  based  upon  the  principle  of  negligence ;  that  is, 
it  proceeds  upon  the  assumption  that  somebody  is  to 
blame  for  every  accident  that  occurs. 

A  number  of  states  have  recently  enacted  workmen's 
compensation  acts,  which  are  based  upon  the  principle 
that  accidents  are  as  much  factors  in  the  cost  of  produc- 
tion and  distribution  as  labor  or  material,  and  that  there- 
fore the  consumer  ought  to  bear  the  charge.  Under  these 
laws  the  injured  workman  or  those  dependent  upon  him 
are  entitled  to  a  regular  schedule  of  pay  for  accidents. 
Indemnities  may  be  paid  either  by  the  employer  carrying 
his  own  risks,  by  indemnity  insurance  companies  in  which 
the  premiums  are  usually  paid  by  the  employers,  by  em- 
ployers' mutual  companies,  or  from  a  state  fund  to  which 
eacli  industry  contributes  in  proportion  to  its  schedule 
as  an  accident  risk.  In  some  states  the  compensation  sys- 
tem is  compulsory.  In  others  it  is  voluntary.  In  the 
latter  case  the  employer  is  usually  deprived  of  the  com- 
mon-law defenses  if  he  chooses  not  to  accept  the  pro- 
visions of  the  law.  Some  state  laws  provide  that  the 
employes  shall  contribute  a  small  amount  to  the  insur- 
ance fund. 

Germany  was  the  first  country  to  introduce  the  princi- 
ple of  compulsory  accident  insurance  in  1884.  Employ- 
ers are  there  organized  into  associations  and  sections  and 
are  compelled  to  bear  the  expense  of  granting  compen- 
sation to  injured  workingmen,  which  compensation 
amounts  to  about  two-thirds  of  their  average  wages.  In 
1897  England,  by  the  passage  of  the  Workmen's  Com- 
pensation Act,  adopted  the  principle  "that  a  workman 


Unemployment  145 

is  entitled  for  all  accidents  of  occupation  to  a  moderate 
and  reasonable  compensation."  Practically  all  the  ad- 
vanced industrial  nations  of  the  world  have  passed  laws 
to  compensate  sufferers  for  all  accidents  in  industry, 
thus  placing  the  burden  of  industrial  accidents  upon  the 
industry  as  such  and  not  upon  the  laborer. 

Sickness,  Old-Age,  and  Unemployment  Insurance 

As  we  have  seen,  sickness  and  old  age  are  still  more 
usual  causes  of  poverty  and  unemployment  than  accident. 
All  the  arguments  for  compulsory  insurance  therefore 
apply  with  peculiar  force  to  these  evils.  Germany  was 
again  the  pioneer  in  the  establishment  of  these  forms  of 
insurance.  In  1883  sickness  insurance  was  organized, 
being  made  compulsory  for  all  persons  with  incomes  un- 
der $500;  one-third  the  expense  is  borne  by  the  workers 
and  two-thirds  by  employers,  the  main  purpose  being  to 
secure  a  sufficient  relief — amounting  to  one-half  the  wage 
— for  a  period  of  thirteen  weeks.  In  1889  invalidity  and 
old-age  insurance  was  introduced  for  the  same  class; 
contributions  are  made  in  equal  proportion  by  employe 
and  employer,  the  state  contributing  about  $12  a  year  to 
each  annuity.  Pensions  are  granted  after  thirty  years 
of  payment  or  to  those  over  seventy. 

In  1908  Great  Britain  passed  a  still  more  comprehen- 
sive measure,  providing  for  a  pension  for  all  citizens  of 
seventy  years  or  over  who  have  been  residents  for  twenty 
years,  in  accordance  with  a  sliding  scale  based  upon  pri- 
vate income,  the  pensions  ranging  from  five  shillings 
weekly  down  to  one  shilling.  Finally,  insurance  against 
unemployment  was  tried  in  Switzerland  in  1893  to  1897, 
but  was  finally  abolished,  owing  to  abuses  and  difficulty 
of  administration.  The  question,  however,  continues  to 
be  a  live  one  for  discussion  and  legislative  proposals. 


146  Business  Economics 

Old-Age  Pensions  in  the  United  States 

Old-age  pension  systems  have  made  their  beginnings 
in  the  United  States  through  various  private  and  public 
schemes.  Many  cities  have  established  pension  systems 
for  their  public  school  teachers,  policemen,  and  firemen. 
There  is  a  widespread  agitation  in  favor  of  pensioning 
all  civil  service  employes  of  the  cities,  states,  and  nation. 
Logically  this  movement  cannot  stop  short  of  including 
all  industrial  toilers  who  are  in  need  of  such  support. 

Already  a  number  of  private  concerns  have  established 
elaborate  pension  systems  for  the  benefit  of  their  em- 
ployes. The  great  railroad  systems  were  among  the  first 
to  make  these  provisions  and  today  old-age  pensions  are 
found  on  most  of  the  roads.  In  the  steel  business  Andrew 
Carnegie  had  set  aside  a  fund  of  $4,000,000  for  the  bene- 
fit of  the  employes  in  his  works.  Later  the  United  States 
Steel  Corporation  dedicated  $8,000,000  for  this  purpose 
and  consolidated  the  two  in  the  United  States  and  Car- 
negie Pension  Funds.  The  International  Harvester 
Company  has  a  very  comprehensive  old-age  and  disable- 
ment pension  system.  The  Western  Union  Telegraph 
Company  on  January  1, 1913,  set  aside  $1,000,000  for  this 
purpose.  Butler  Brothers'  Wholesale  Houses  have  long 
had  such  a  plan  in  operation,  and  many  similar  systems 
are  to  be  found  in  other  industries.  Mention  should  be 
made  of  the  Carnegie  pension  system  for  superannuated 
college  and  university  teachers. 

These  old-age  pension  systems  which  have  been  estab- 
lished by  private  concerns  are  not  receiving  general  ap- 
proval and  especially  not  from  the  most  immediate  bene- 
ficiaries, the  laborers.  The  great  objection  to  them  is 
that  the  workmen  do  not  receive  these  benefits  of  right. 
These  corporations  cannot  afford  to  provide  these  bene- 


Unemployment  147 

fits  as  a  system  of  charity  distribution.  They  must  re- 
ceive some  financial  return  for  their  outlay  in  the  form  of 
steadier  and  more  faithful  emplo\nnent  as  well  as  greater 
loyalty  from  their  workmen.  Tlie  pension  relief  plans 
are  usually  beset  with  conditions  which  limit  the  freedom 
of  the  laborer  in  his  efforts  for  self -improvement.  The 
pension  system  often  acts  as  a  system  of  intimidation, 
in  that  workmen  must  not  ask  for  higher  wages,  shorter 
hours,  better  working  conditions,  or  even  participate  in 
labor  union  activities,  of  which  some  of  these  firms  dis- 
approve, under  penalty  of  arbitrary  discharge  from  serv- 
ice, even  after  long  years  of  employment,  and  loss  of 
their  pension  privileges.  For  these  reasons  private  pen- 
sion schemes  cannot  satisfy  the  strong  social  demand  for 
old-age  benefits. 

There  are  probably  no  more  important  practical  eco- 
nomic problems  than  those  connected  with  unemployment 
and  workingmen's  insurance.  Slowly  the  conviction  has 
spread  that  under  present  conditions  of  industry  work- 
ingmen  cannot  fairly  be  held  responsible  for  industrial 
accidents,  and  that  with  prevailing  wages  they  cannot  be 
expected  to  save  enough  to  maintain  themselves  in  sick- 
ness and  old  age.  It  therefore  becomes  the  duty  of  so- 
ciety so  to  organize  industry  and  legislation  that  the 
terrors  of  accidents,  sickness,  and  old  age  shall  be  re- 
duced to  a  minimum. 


TEST  QUESTIONS 

1.  How  does  Carroll  D.  Wright  define  unemployment? 

2.  According  to  Professor  IMarshall,  what  has  been  the  effect 
of  the  factory  system  upon  unemployment? 

3.  How  may  the  unemployed  be  classified? 

4.  "What  are  the  chief  causes  of  unemployment? 


148  Business  Economics 

5.  How  can  the  modern  employer  help  to  reduce  unemploy- 
ment among  laborers? 

6.  What  are  some  of  the  economic  changes  necessary  to  re- 
duce unemployment? 

7.  Is  there  any  educational   problem   connected   with  unem- 
ployment ? 

8.  According  to  statistics,  what  are  the  chief  causes  of  indus- 
trial accidents? 

9.  What  is  meant  by  the  doctrine  of  assumption  of  risk? 

10.  What  is  meant  by  the  doctrine  of  the  fellow-servant? 

11.  What  is  meant  by  the  doctrine  of  contributory  negligence? 

12.  Why  are  these  three  doctrines  in  their  old  common-law 
form  unjust  to  labor  in  modern  business  ? 

13.  How  has  the  movement  toward  workmen's  compensation 
legislation  remedied  these  evils? 

14.  To  what  extent  are  sickness,  old  age,  and  unemployment 
cared  for  in  Germany  ?     In  England  ?     In  the  United  States  ? 


CHAPTER  XI 
machinery  and  industrial  efficiency 

Evils  of  Machinery 

So  far  in  the  discussion  of  modern  capitalistic  produc- 
tion and  of  the  various  labor  problems  to  which  it  has 
given  rise  we  have  not  treated  in  detail  the  question  of 
machinery  and  its  effects  on  labor.  We  cannot,  however, 
leave  this  subject  without  taking  up  this  phase  of  it  with 
considerable  care.  The  advantages  of  machinery  have 
been  more  often  emphasized  than  the  evils;  so  we  may 
profitably  begin  with  the  darker  side  of  the  picture.  Pres- 
ident Hadley  ^  enumerates  three  evils  which  are  charged 
against  machinery  as  now  managed  and  operated : 

1.  That  it  displaces  a  large  amount  of  human  labor,  thus  tak- 
ing income  away  from  employes  and  giving  it  to  employers.  2. 
That  when  it  does  not  actually  drive  human  labor  out  of  use,  it 
employs  it  in  circumstances  unfavorable  to  efficiency,  health, 
and  morals.  3.  That  under  the  best  conditions  it  deprives  the 
workman  of  independence,  making  him  a  specialized  machine 
instead  of  a  broad-minded  man. 

We  cannot  do  better  than  take  up  these  points  one  by 
one. 

Displacement  of  Labor  by  Machinery 

In  answer  to  the  first  charge  President  Hadley  flatly 
denies  that  machinery  has  displaced  labor,  but  insists  that 

1  Economics,  p.  337. 

149 


150  Business  Economics 

''there  has  been  a  most  conspicuous  increase  of  employ- 
ment in  those  lines  where  improvements  in  machinery 
have  been  greatest,"  giving-  the  expansion  of  railroads  as 
an  illustration.  But  it  is  not  possible  to  generalize  from 
this  case  without  further  analysis.  The  immediate  effect 
of  improved  machinery,  especially  if  suddenly  intro- 
duced, is  practically  always  to  throw  men  out  of  employ- 
ment. The  extent  to  which  this  will  occur  depends  on  the 
suddenness  and  extensiveness  of  the  change,  but  fortu- 
nately, as  Professor  Nicholson  points  out,  new  inven- 
tions seldom  come  suddenly  or  are  introduced  all  at  once 
on  an  extensive  scale.  It  took  almost  a  generation,  for 
example,  for  American  machine  methods  to  displace 
Swiss  hand  labor  in  the  making  of  watches.  But  when 
such  a  change  does  occur  it  hits  hardest  the  least  efficient 
and  older  men,  those  just  on  the  margin  of  employment, 
for  a  man  past  middle  life  can  rarely  learn  a  new  trade. 
The  effect  of  displacement  in  causing  suffering  will 
also  depend  somewhat  (1)  upon  the  mobility  of  labor, 
(2)  upon  the  knowledge  of  new  opportunities  and  the 
capital  to  make  possible  a  change  of  location  or  industry, 
and  (3)  upon  improvements  in  the  means  of  transporta- 
tion. It  can  easily  be  shown  that  as  a  general  principle 
the  lump-of-labor  theory — namely,  that  there  is  just  so 
much  work  to  be  done  and  that  if  machinery  is  introduced 
for  this  purpose  there  will  be  less  work  for  men  to  do,  is 
erroneous.  But  there  is  this  element  of  truth  in  it,  that 
the  question  whether  or  not  men  will  be  reabsorbed  in 
the  same  industry  depends  upon  whether  or  not  the  mar- 
ket for  the  goods  produced  by  the  new  machine  can  be 
expanded.  If  the  demand  is  elastic,  that  is,  can  be  largely 
extended  because  of  the  fall  in  price  brought  about  by 
the  cheaper  production,  as  in  the  case  of  cotton  goods, 
then  the  displaced  laborers  will  probably  be  re-employed 


Industrial  Efficiency 


151 


to  produce  an  enlarged  supply.  If,  however,  the  demand 
is  inelastic,  that  is,  will  not  be  expanded  by  reason  of  a 
fall  in  price,  as  in  the  case  of  salt  or  coffins,  then  the  dis- 
placed labor  will  not  be  reabsorbed  in  the  same  industry 
but  must  look  elsewhere  for  employment. 

Is  New  Employment  Created? 

The  elaborate  investigation  of  the  Department  of  La- 
bor in  1898  regarding  the  relative  merits  of  hand  and 
machine  labor  shows  clearly  the  effect  on  the  displace- 
ment of  labor  by  the  introduction  of  machinery.  A  few 
cases  will  serve  as  illustrations. 

Hand  and  Machine  Methods  Compared 


Year  of 
Produc- 
tion 


Articles 
Produced 


55  '^  S 

&.  aj  fc 

fc  £  IS 


Time  Worked 

b  Pi  fc 

Hours 

Minutes 

4 

61 

5 

6 

3 

19 

2 

1436 

40 

113 

154 

5 

18 

4047 

30 

81 

509 

1 

1 

200 

0 

10 

2 

51 

d^ 


1829-30 
1895-96 

1859 
1895 

1850 
1895 

1891 
1896 


Wheat   (hand)    

Wheat   (machine)    . . .  . 

Boots  (hand)   

Boots   (machine)    

Carpet  (hand)    

Carpet   (machine)    .  . .  . 

Loading  ore  (hand) .  . . 
Loading  ore   (machine) 


83 
122 


15 
41 


$3.55 
.66 

408.50 
35.40 

20.24 
.29 

40.00 
.55 


These  cases,  chosen  at  random,  all  show  an  increase  in 
the  number  of  different  men  employed  and  an  immense 
saving  in  time  and  in  labor  cost.  Nothing  is  indicated 
however  as  to  the  total  amount  of  employment.     Opti- 


152  Business  Economics 

mistic  writers  like  Carroll  D.  Wright  claim  that  if  ma- 
chinery has  displaced  labor  in  one  direction  it  has  created 
more  employment  for  them  in  others.  He  shows  for  in- 
stance -  that  in  1830  the  per  capita  consumption  of  cot- 
ton in  this  country  was  5.9  pounds,  while  in  1890  it  was 
19  pounds,  and  gives  similar  figures  for  iron  and  steel 
and  railroad  traflBc.  It  will  be  noticed  that  all  of  his 
examples  are  chosen  from  industries  in  which  the  de- 
mand is  elastic. 

Mr.  J.  A.  Hobson,  a  more  careful  and  conservative 
writer,  draws  less  optimistic  conclusions  from  a  study  of 
Great  Britain.    He  says : 

First,  so  far  as  the  aggregate  of  manufactures  is  concerned, 
the  net  result  of  the  increased  use  of  machinery  has  not  been  to 
offer  an  increased  demand  for  labor  in  those  industries  com- 
mensurate with  the  growth  of  the  working  population.  Second, 
an  increased  proportion  of  the  manufacturing  population  is 
employed  either  in  those  branches  of  the  large  industries  where 
machinery  is  least  used,  or  in  the  smaller  manufactures  which 
are  either  subsidiary  to  the  large  industries,  or  are  engaged  in 
providing  miscellaneous  comforts  and  luxuries.^ 

It  must  be  said,  however,  in  modification  of  Mr.  Hob- 
son's  inferences,  that  it  may  be  accounted  as  a  social  gain 
if  the  demand  for  manufactured  commodities  can  be  met 
by  the  labor  of  a  smaller  proportion  of  the  population, 
since  the  energies  of  the  rest  are  then  set  free  for  pro- 
fessional or  artistic  or  similar  pursuits.  A  study  of  the 
census  reports  of  Great  Britain  seems  to  show  that  this 
is  what  has  happened  in  that  country. 

2  Industrial  Evolution  of  the  United  States,  chap.  28. 

3  Evolution  of  Modern  Capitalism,  p.  229. 


Industrial  Efficiency  153 

Irregularity  of  Employment 

The  amount  of  labor  is  not  the  only  factor  to  be  con- 
sidered ;  the  regularity  of  employment,  as  we  saw  in  the 
last  section,  is  of  hardly  less  importance.  Professor 
Nicholson  says :  ^ 

Another  danger  of  an  entirely  opposite  kind  lurks  in  this 
immense  power  of  machinery,  which  is  continually  showing  its 
reality  and  remedies  for  which  will,  it  is  to  be  feared,  be  the 
fruit  of  long  years  of  tentative  adaptation  to  the  new  environ- 
ment. What  all  sensible  workingmen  desire,  what  the  advo- 
cates of  the  trade  unions  say  is  their  chief  object,  is  to  get  a 
"steady  sufficient  wage,"  but  it  has  been  proved  inductively  that 
great  fluctuations  in  price  occur  in  those  commodities  which 
require  for  their  production  a  large  proportion  of  fixed  capital. 
These  fluctuations  in  price  are  accompanied  by  corresponding 
fluctuations  in  wages  and  irregularity  of  employment.  But 
fluctuations  in  wages  and  discontinuities  in  employment  are  two 
of  the  greatest  evils  which  can  befall  the  laboring  classes. 

We  have  already  seen  how  modern  capitalistic  meth- 
ods of  production  may  lead  to  overproduction  and  to  a 
crisis.  We  now  see  how  machine  methods  may  cause  un- 
employment or  irregular  employment.  The  men  dis- 
placed directly  by  ncAv  machinery,  those  thrown  out  of 
work  by  industrial  depression  resulting  from  over- 
production in  machine  industries,  and  finally  those  irreg- 
ularly employed  in  the  new  occupations  supplying 
luxuries — all  of  these  may  fairly  attribute  their  suffer- 
ing in  large  measure  to  machine  methods. 

Lowering  of  the  Grade  of  Labor 

The  second  great  charge  made  against  the  factory  system  is 
that  it  displaces  a  higher  grade  of  labor  by  a  lower  grade ;  some- 

*  The  Effects  of  Machinery  on  Wages,  p.  65. 


154  Business  Economics 

times  substituting  the  work  of  women  and  children  for  that  of 
men;  sometimes  substituting  work  under  conditions  physically 
or  morally  unhealthful,  for  work  under  healthful  conditions; 
sometimes  substituting  specialized  and  mechanical  work  for 
diversified  occupation  which  contributes  to  general  intelligence. 

The  point  as  to  the  labor  of  women  and  children  has 
already  been  discussed.  The  charge  that  factory  labor  is 
physically  unhealthful  may  in  general  be  denied.  Mr. 
Wright,  in  an  elaborate  defense  of  the  factory  system  in 
the  Tenth  Census,  concluded  that  the  conditions  of  work 
in  the  modern  factory  are  much  more  conducive  to  good 
health  than  those  under  the  preceding  domestic  system, 
while  morally  they  are  far  superior.  The  qualities  de- 
manded by  the  machine  production  of  the  modern  factory 
are  punctuality,  steadiness,  reliability,  and  sobriety,  and 
it  therefore  makes  against  intemperance  and  immorality. 
So  far  as  these  exist  in  factory  towns,  they  are  the  result 
of  town  life  rather  than  of  manufacturing.  It  must, 
however,  be  said  that  while  the  factory  system  is  not  in- 
herently unhealthful,  the  high  pressure  at  which  oper- 
atives of  steam-driven  machinery  are  compelled  to  work, 
particularly  in  this  country,  may  and  often  does  wear 
them  out  prematurely.  This  again  is  partially  offset  by  a 
shortening  of  the  hours  of  labor. 

MoNOToxY  OF  Work 

The  final  charge  against  the  factory  system  is  monot- 
ony of  work.  Many  writers,  from  Adam  Smith  down, 
take  the  view  that  it  is  more  stupefying  to  make  a  small 
part  of  an  article,  say  the  sixty-fourth  part  of  a  shoe, 
than  to  make  the  whole  article.  Professor  Marshall,  who 
has  considered  the  subject  carefully,^  concludes  that  while 

5  Principles  of  Economics,  Vol.  I,  p.  315. 


Industrial  Efficiency  155 

it  takes  away  manual  skill,  it  substitutes  higher  or  more 
intellectual  forms  of  skill.  "The  more  delicate  the  ma- 
chine's power  the  greater  is  the  judgment  and  careful- 
ness which  is  called  for  from  those  who  see  after  it." 
But  after  all  there  is  less  danger  from  monotony  of  work 
than  from  monotony  of  life,  and  the  cure  for  this  would 
seem  to  be  in  an  increase  of  machinery  rather  than  in 
its  abolition. 

Conclusions  as  to  Machinery 

Let  us  now  try  to  summarize  our  conclusions  on  this 
intricate  question.  The  first  effect  of  the  introduction  of 
labor-saving  machinery  is  to  displace  particular  laborers ; 
these  suffer  real  injury,  though  they  are  often  reabsorbed 
in  the  industrial  organism.  The  social  gain  is  undoubted, 
for  the  improved  methods  lead  to  lower  prices  and  thus 
to  an  increase  in  the  real  wages  of  labor.  To  the  im- 
provement and  wider  use  of  machinery  we  must  indeed 
look  for  the  ultimate  relief  of  the  human  race  from  ex- 
hausting toil.    Says  a  socialist  writer : 

On  mechanical  slavery,  on  the  slavery  of  the  machine,  the 
future  of  the  world  depends.  *  *  *  All  unintellectual 
labor,  all  monotonous,  dull  labor,  all  labor  that  deals  with  dread- 
ful things,  and  involves  unpleasant  conditions,  must  be  done  by 
machinery.  Machinery  must  work  for  us  izi  coal  mines,  and  do 
all  sanitary  services,  and  be  the  stoker  of  steamers,  and  clean  the 
streets,  and  run  messages  on  wet  days,  and  do  an}i;liing  that  is 
tedious  or  distressing. 

If  labor  today  has  a  complaint  to  make  against  the  use 
of  machinery,  it  is  that  labor  has  not  shared  sufficiently 
in  the  improvements  thus  far  effected.  But  the  evil  here 
is  connected  with  the  inequitable  distribution  of  wealth, 
not  with  the  methods  of  its  production.    In  justice  labor 


156  Business  Economics 

should  share  in  the  technical  improvements  which  char- 
acterized the  nineteenth  century  and  which  will  revolu- 
tionize to  a  still  greater  extent  the  industries  of  the  twen- 
tieth. The  practical  question  in  this  connection  is  as  to 
the  best  method  for  labor  to  secure  its  claim  to  a  share  in 
the  increased  production.  One  answer,  to  which  we  shall 
turn  next,  is  by  increasing  its  efficiency  through  better 
industrial  education  and  training. 

Industkial  Education 

The  subject  of  industrial  education  has  recently  been 
receiving  considerable  attention  in  the  United  States  and 
the  needs  and  shortcomings  of  our  country  in  this  regard 
have  been  described.  Under  modern  methods  of  produc- 
tion, with  their  extreme  specialization  of  labor  and  ex- 
tended use  of  machinery,  it  is  practically  impossible  for 
a  worker  to  secure  an  adequate  knowledge  of  a  trade  in 
the  actual  practice  of  it.  In  former  days  boys  acquired 
training  in  their  trades  by  the  system  of  apprenticeship 
under  the  immediate  charge  of  a  master  of  the  craft. 
The  system  of  apprenticeship  has  today  almost  disap- 
peared; boys  are  taken  into  shops  as  helpers,  not  as  ap- 
prentices, and  receive  practically  no  systematic  instruc- 
tion in  their  trade,  especially  in  a  large  modern  estab- 
lishment. In  consequence  of  these  facts  it  is  insisted  that 
school  instruction  should  be  given  to  make  good  the  ab- 
sence of  shop  practice;  that  a  general  system  of  indus- 
trial education  should  be  developed  to  give  our  working- 
men  systematic  training  in  the  various  trades.  The  su- 
periority of  the  opportunities  for  industrial  education  on 
the  continent  of  Europe,  especially  in  Germany,  has  been 
frequently  emphasized,  and  Germany's  industrial  ad- 
vance has  been  credited  in  large  measure  to  this  fact. 
We  can  probably  not  approach  'the  subject  better  than 


Industrial  Efficiency  157 

by  explaining  the  systems  in  these  other  countries  and 
then  comparing  them  with  that  of  the  United  States. 

INDUSTRIAL,    EDUCATION    IN    GERMANY 

Beginning  with  Germany  as  the  country  in  which  in- 
dustrial education  has  received  the  greatest  attention,  we 
find  there  three  different  kinds  of  schools,  which  we  may 
call  the  lower,  middle,  and  higher.  The  lower  group  in- 
cludes artisan  and  specialized  trade  schools,  and  is  in- 
tended to  be  a  substitute  for  the  apprenticeship  system. 
While  they  have  an  important  influence  on  the  general 
industrial  efficiency  of  the  nation,  they  concern  chiefly  the 
small  handicrafts.  The  middle  group  comprises  the  trade 
schools  (Gewerbeschulen),  of  which  the  most  famous  are 
the  weaving  and  dyeing  schools  at  Chemnitz;  other 
branches  taught  are  soap-boiling,  milling,  building,  pot- 
tery, etc.  These  are  the  schools  which  provide  technical 
instruction  for  the  large  manufacturing  industries,  and 
are  consequently  of  great  importance;  they  train  the 
foremen,  superintendents,  managers,  and  heads  of  estab- 
lishments rather  than  the  workingmen.  The  higher 
group  is  formed  of  the  technical  high  schools  or  tech- 
nological institutes,  where  the  scientific  experts  are 
trained.  The  importance  of  the  German  system  lies  in 
the  development  of  the  last  two  groups  rather  than  in 
provision  for  the  training  of  the  workmen.  Germany's 
recent  industrial  advance  must  be  credited  to  the  train- 
ing of  the  officers,  not  the  rank  and  file,  in  the  industrial 
army,  to  the  development  of  managerial  ability  rather 
than  of  manual  skill.  The  splendid  systems  of  continu- 
ation schools,  which  have  been  established  in  many  cities, 
are  however  endeavoring  to  raise  the  general  standard  of 
intelligence  and  efficiency  of  the  rank  and  file  as  well  as 
to  prepare  them  for  definite  trade  positions. 


158  Business  Economics 

INDUSTRIAL   EDUCATION    IN    ENGLAND 

In  England  the  last  twenty  years  have  seen  a  mar- 
velous development  in  industrial  education,  brought 
about  in  part  by  the  "made  in  Germany"  agitation.  The 
English  system  of  industrial  education  differs  from  the 
German.  It  attempts  to  educate  working-class  boys, 
while  at  work  in  the  mill  or  at  the  forge,  to  be  foremen, 
managers,  etc.,  mainly  by  means  of  evening  classes  in 
trade  or  technical  schools.  The  German  system,  on  the 
other  hand,  trains  men  who  already  have  a  superior  gen- 
eral education.  These  schools  are  regarded  as  stepping- 
stones  for  the  more  ambitious  and  intelligent  young 
workingmen.  They  give  a  practical  grasp  of  the  sub- 
jects, but  do  not  teach  actual  processes  of  manufacture, 
owing  to  trade  union  objections.  They  thus  come  be- 
tween the  lower  and  middle  schools  in  Germany.  The , 
higher  technical  schools  also  exist  and  have  recently  been 
greatly  expanded. 

INDUSTRIAL   EDUCATION   IN    THE   UNITED   STATES 

The  system  of  industrial  education  in  the  United 
States  ma}^  be  said  to  resemble  that  of  Germany  more 
than  that  of  England,  as  it  supplies  industries  from  above 
rather  than  from  below,  but  it  is  in  a  very  chaotic  state 
as  yet.  The  most  important  schools  are  institutes  of 
technology  and  the  technical  departments  of  the  univer- 
sities, but  these  train  men  only  for  the  highest  positions. 
Along  this  same  line,  colleges  and  universities  have  es- 
tablished courses,  departments,  and  schools  in  business 
administration  for  the  purpose  of  training  for  the  higher 
administrative  and  industrial  positions.  Provisions  for 
the  individual  training  of  the  workmen  are  gradually  be- 
ing made,  notably  in  manufacturing  centers.    Thus  there 


Industrial  Efficiency  159 

are  a  few  trade  schools  resembling  somewhat  those  in 
the  middle  German  group,  as  the  textile  schools  at 
Philadelphia,  Lowell,  and  a  few  other  cities.  Lower 
grade  schools  and  industrial  high  schools  are  found  in 
nearly  all  large  cities.  Instniction  in  agriculture  is 
given  in  a  great  many  states  in  the  public  schools  and  in 
special  agricultural  schools. 

A  considerable  beginning  has  therefore  been  made  in 
industrial  education,  but  it  is  still  inadequate  to  supply 
the  needs  of  the  country.  The  work  that  is  being  given 
has  not  reached  its  highest  possibilities  for  usefulness 
in  that  the  contents  of  the  courses  are  not  always  the  best 
and  the  methods  of  instruction  are  crude.  There  is  a 
great  shortage  of  well-trained  teachers  as  well  as  a  want 
of  a  clear  perception  of  purposes  and  ends.  That  there 
is  a  distinct  need  of  and  demand  for  instruction  of  this 
character  is  shown  by  the  enormous  expansion  of  corre- 
spondence schools,  a  peculiarly  American  institution, 
which  endeavor  to  give  the  training  afforded  by  the  Eng- 
lish schools  to  the  more  ambitious  young  artisans. 

Need  of  Better  Training 

So  far  in  their  industrial  development  the  people  of 
the  United  States  have  been  immensely  aided  by  two  fac- 
tors: (1)  the  rich  natural  resources  of  the  country  and 
(2)  the  high  quality  of  the  labor.  But  as  we  have  already 
seen,  the  natural  resources  are  being  either  rapidly  ex- 
hausted or  monopolized.  As  to  the  character  of  the  sec- 
ond factor,  we  may  quote  from  the  testimony  of  a  recent 
careful  observer,  Dr.  A.  Shadwell :  ^ 

The  American  method  of  work  in  the  industrial  sphere  is 
distinguished  by  the  following  features:  enterprise,  audacity, 

c  Industrial  Efficiency,  Vol.  II,  p.  451. 


160  Business  Economics 

push,  restlessness,  eagerness  for  novelty,  inventiveness,  emula- 
tion, and  cupidity.  Employers  and  employed  have  exhibited 
the  same  qualities  in  their  degree. 

But  they  suffer  "from  the  national  defect  of  want  of 
thoroughness,  which  arises  from  the  craving  for  short 
cuts."  Now  that  American  industries  are  entering  the 
markets  of  the  world  in  international  competition,  it  be- 
comes important  to  correct  any  faults  that  will  cause  us 
to  fall  behind. 

The  movement  for  better  industrial  education  through 
the  establishment  of  trade  schools  has  met  two  obstacles 
in  this  country.  The  first  is  the  hostility  of  the  trade 
unions,  which  fear  to  see  their  control  of  the  labor  mar- 
ket disturbed  by  the  annual  turning  out  of  hundreds  or 
thousands  of  workers  from  the  trade  schools  Avithout  any 
special  sjTiipathy  with  trade  union  methods  or  policies. 
The  other  difficulty  lies  in  the  satisfaction  with  prevail- 
ing methods,  the  belief  that  the  American  workman  with- 
out training  possesses  skill  superior  to  that  of  his  Euro- 
pean competitors,  and  a  naive  national  self-conceit  in  all 
things  American.  Now  that  we  are  for  almost  the  first 
time  in  a  hundred  years  measuring  our  industrial  effi- 
ciency in  foreign  markets  against  our  European  com- 
petitors, we  shall  be  compelled  to  take  stock  of  all  the 
items  that  make  for  industrial  supremacy.  There  seems 
to  be  little  doubt  that  when  this  is  once  fairly  done,  the 
need  of  a  better  system  of  industrial  education  will  be 
recognized  and  met. 

TEST  QUESTIONS 

1,  What  three  evils  are  often  charged  against  machinery? 

2.  What  three  factors  have  an  influence  on  the  suffering  that 
is  caused  by  displacement  of  labor  when  new  machines  are  in- 
troduced ? 


Industrial  Efficiency  161 

3.  According  to  the  investigation  of  the  Department  of  Labor, 
what  effect  does  the  introduction  of  machinery  have  on  the 
displacement  of  labor? 

4.  How  may  machine  methods  cause  irregularity  in  wages 
and  employment? 

5.  Does  the  introduction  of  labor-saving  machinery  lower  the 
grades  of  labor?    Illustrate. 

6.  What  can  you  say  concerning  the  charge  often  made  against 
machinery,  namely,  that  it  makes  labor  monotonous? 

7.  Show  the  need  of  a  system  of  industrial  education  in  the 
United  States. 

8.  What  is  the  system  of  industrial  education  which  exists  in 
England  ? 

9.  How  does  the  German  sj^stem  of  industrial  education  differ 
from  the  English? 

10.  What  is  the  situation  with  respect  to  industrial  education 
in  the  United  States? 

11.  How  does  foreign  competition  compel  us  to  pay  attention 
to  the  problem  of  industrial  education? 


CHAPTER  XII 
profit-sharing  and  co-operation 

The  Nature  of  Profit-Shaeing 

Among  the  reforms  suggested  for  remedying  some  of 
the  evils  incident  to  the  modern  wage  system  those  of 
profit-sharing  and  co-operation  occupy  a  prominent 
place.  The  separation  of  the  community  into  capitalists 
and  laborers,  classes  different  in  conditions  and  ideals, 
constitutes  a  menace  to  the  peace  and  progress  of-indus- 
trial  society.  The  wage  system,  moreover,  is  thought 
by  many  to  have  broken  down  the  former  intimate  rela- 
tion of  employer  and  worker,  and  some  scheme  is  needed 
to  correlate  their  interests  again  and  to  bind  them  to- 
gether. To  secure  this  result  profit-sharing  is  advocated. 

As  defined  by  the  International  Co-operative  Congress 
in  1897  this  is  "the  agreement,  freely  entered  into,  by 
which  the  employe  receives  a  share,  fixed  in  advance,  of 
the  profits."  It  is  not  a  change  from  the  present  wage 
system,  but  simply  a  modification  of  that  system,  accord- 
ing to  which  the  laborer  receives  a  share  in  the  profits 
in  addition  to  his  wages.  The  purpose  is  to  identify  the 
interests  of  the  employes  with  those  of  their  employer 
and  thus  give  them  some  of  the  same  motives  for  energy, 
care,  and  thrift  in  the  conduct  of  the  business.  Three 
principal  methods  of  profit-sharing  may  be  mentioned, 
though  the  variations  are  manifold.  The  favorite 
method  in  England  and  the  United  States  is  the  payment 

162 


Profit-Sharing  163 

of  a  cash  bonus  at  the  end  of  a  fixed  period,  such  as  a 
year.  A  second  plan,  which  is  the  rule  in  France,  is  a 
deferred  participation  by  means  of  a  savings  bank  de- 
posit, provident  fund,  or  annuity,  for  the  purpose  of 
providing  for  old  age  and  disability.  The  third  plan, 
which  has  recently  grown  in  favor  in  this  country,  is  the 
payment  in  shares  of  stock  of  the  company. 

Advantages  of  Pkofit-Shaeing 

The  economic  theory  of  profit-sharing  is  that  by  induc- 
ing greater  care  and  diligence  on  the  part  of  the  employe 
he  will  himself  create  the  fund  from  which  he  is  paid. 
It  is  claimed  by  its  advocates  that  it  increases  both  the 
quantity  and  the  quality  of  the  product  and  that  it  pro- 
motes greater  care  of  implements  and  materials,  thus  re- 
ducing the  cost  at  the  same  time  that  it  increases  the  out- 
put. The  classic  example  of  this  is  the  case  of  the  origi- 
nal profit-sharing  scheme,  the  Maison  Leclaire,  in  Paris : 
the  result  of  the  first  six  years'  experiment  was  a  divi- 
dend on  wages  of  $3,753  a  year,  derived  entirely  from  the 
increased  economy  and  care  of  the  workers. 

In  some  cases,  however,  the  object  of  the  employers  is 
to  secure  immunity  from  strikes  and  other  labor  disturb- 
ances and  a  greater  permanence  of  the  labor  force ;  par- 
ticipation in  profits  is  conditioned  upon  the  men's  abstain- 
ing from  joining  a  trade  union  or  upon  uninterrupted 
service.  In  these  cases  the  deferred  participation  plan  is 
used.  The  advantages  claimed  for  the  system  are  not 
merely  the  increase  in  product  already  spoken  of  and  the 
greatest  efficiency  of  the  worker,  but  also  the  improve- 
ment in  his  material  and  moral  standards  and  the  promo- 
tion of  industrial  peace  by  lessening  discontent  and  fric- 
tion.   The  main  basis  for  the  system,  since  it  is  economic 


164  Business  Economics 

and  not  philanthropic  in  its  nature,  must  of  course  be 
the  increase  in  production  brought  about  by  its  adoption. 

Objections  to  Peofit-Sharing 

benefits  uncertain 

More  weighty,  however,  appear  the  objections  against 
profit-sharing,  which  seem  to  have  had  sufficient  force  to 
cause  the  failure  of  a  number  of  ventures  in  this  direc- 
tion. In  the  first  place  the  relation  between  the  in- 
creased effort  of  a  single  workman  and  the  success  of  a 
general  business  is  so  remote,  especially  in  our  compli- 
cated modern  industry,  that  it  is  unlikely  to  act  as  a  very 
powerful  stimulus.  Bpt  even  if  it  should,  the  savings 
thus  effected  might  be  swept  away  by  the  poor  business 
management  of  the  employer. 

It  is  quite  possible  that  the  workman  who,  in  the  hope  of 
earning  "bonus  to  labor,"  has  done  work  10  per  cent  in  excess 
of  the  normal  standard,  may,  even  under  a  liberal  scheme,  find 
that,  instead  of  receiving  an  addition  to  his  normal  wages  of, 
say,  7  per  cent,  the  bad  management  of  his  employer  has  re- 
duced his  bonus  to  so  low  a  level  that  he  has  to  be  content  with 
a  supplement  equivalent  to  only  2  per  cent  on  his  wages,  or 
that,  as  has  been  the  case  in  a  large  proportion  of  the  schemes 
*     *     *     no  bonus  whatever  is  forthcoming.^ 

It  is  undesirable  to  make  the  earnings  of  the  laborer 
dependent  in  any  way  upon  the  fluctuations  of  business 
or  the  ability  of  the  employer.  The  ordinary  wage  sys- 
tem has  at  least  the  merit  that  the  reward  of  the  laborer 
is  made  dependent  only  on  his  own  efforts.  The  lot  of 
the  modern  worker  is  too  unstable  and  employment  too 

1  Schloss,  Methods  of  Industrial  Bcmuneration,  p.  305. 


Profit-Sharing  165 

unsteady  to  add  a  new  element  of  uncertainty  in  wages. 
If  the  laborer  has  really  earned  the  premium,  say  labor 
leaders,  why  not  add  it  to  his  wages  instead  of  adopting 
this  roundabout  method?  The  sliding  scale,  or  a  system 
of  premiums  or  bonus  payments  for  increased  output, 
would  be  better  than  profit-sharing,  and  is  rapidly 
spreading. 

LIMITS    FEEEDOM    OF    LABOR 

This  leads  to  the  second  objection,  namely,  that  profit- 
sharing  paralyzes  the  efforts  of  the  laborers  to  better 
their  own  conditions  through  trade  unions,  strikes,  or 
other  methods.  The  trade  union  attitude  was  vigorously 
stated  by  President  Gompers,  of  the  American  Federa- 
tion of  Labor,  in  his  testimony  before  the  Industrial 
Commission :  ^ 

There  have  been  few,  if  any,  of  these  concerns  which  have 
been  even  comparatively  fair  to  their  employes.  *  *  *  They 
made  the  work  harder,  longer  hours,  and  when  the  employes 
of  other  concerns  in  the  same  line  of  trade  were  enjoying  in- 
creased wages,  shorter  hours  of  labor,  and  other  improvements, 
tending  to  the  material  progress  of  the  worker,  the  employes  of 
the  concern  where  so-called  profit-sharing  was  the  system  at 
the  end  of  the  year  found  themselves  receiving  lower  wages  for 
harder  work  than  were  those  who  were  not  under  that  beneficent 
system. 

As  long  as  the  system  is  viewed  with  suspicion  by  the 
laborer  or  used  as  a  weapon  in  industrial  bargaining  by 
employers,  the  plan  is  foredoomed  to  failure.  But  even 
were  it  managed  in  the  proper  spirit,  it  is  after  all  appli- 
cable to  only  a  comparatively  few  industries,  namely, 

zEeport,  Vol.  VII,  p.  644. 


166  Business  Economics 

those  in  which  labor  makes  up  the  largest  part  of  the  cost 
of  production.  In  most  modern  industries  capital  plays 
such  an  important  role  as  compared  with  labor  that  the 
field  for  this  plan  is  comparatively  limited. 

Future  of  Peofit-Shaeing 

In  the  actual  practice  of  profit-sharing  there  have  been 
many  interesting  experiments  and  not  a  few  failures.  It 
may  be  said  to  date  from  1842,  when  M.  Leclaire,  a  Pari- 
sian painter  and  house  decorator,  introduced  it  into  his 
business.  The  practice  has  since  spread  over  France 
and  England ;  it  has  met  with  little  success  in  the  rest  of 
Europe.  In  the  United  States  the  movement  has  been 
more  recent  and  of  smaller  proportions.  The  reason  for 
this  is  suggested  by  President  Hadley  as  follows :  ^ 

Where  the  laborers  under  the  old  wage  system  are  not  work- 
ing up  to  a  high  standard  of  efficiency,  there  is  more  chance  for 
the  success  of  profit-sharing.  This  seems  to  be  the  reason  why 
it  works  better  on  the  Continent  than  in  England,  and  better  in 
England  than  in  America. 

The  United  States  Steel  Corporation  has  adopted  a 
system  of  profit-sharing  which  benefits  only  managers 
and  those  higher  up  in  the  service.  This  plan  attempts  to 
encourage  efficiency  in  production  by  increasing  the  in- 
terest and  efficiency  of  management. 

The  future  of  profit-sharing  seems  uncertain.  A  great 
many  of  the  schemes  which  have  been  tried  at  one  time 
or  another  have  been  abandoned.  Labor  will  probably 
continue  to  oppose  profit-sharing  schemes  which  do  not 
aim  toward  labor  partnership  in  industry.  Such  a  sys- 
tem has  been  adopted  in  the  South  Metropolitan  Gas 

3  Economics,  p.  377. 


Pro  fit -Sharing  167 

Company,  England,  where  the  laborers  are  permitted  to 
elect  three  of  the  members  of  the  board  of  directors.  In 
this  direction,  as  a  step  to  a  full  partnership  of  labor  in 
industry,  there  may  be  a  greater  future  in  profit-sharing. 

Co-OPERATION 

More  far-reaching  than  profit-sharing,  which  involves 
only  a  change  in  the  method  of  payment  of  wages,  is  co- 
operation, which  involves  a  change  of  management  as 
well.  Its  final  goal,  in  the  minds  of  its  advocates,  is  the 
radical  modification  if  not  ultimate  abolition  of  the  pres- 
ent wage  system.  While  profit-sharing  is  paternalistic 
and  is  directed  to  an  increase  of  production,  co-operation 
may  be  said  to  be  democratic  and  to  aim  at  a  more  equit- 
able distribution.  Under  this  plan  the  laborers  hope  to 
divert  to  themselves  the  large  amount  of  profits  w^hich 
they  now  see  going  into  the  possession  of  their  employ- 
ers. By  eliminating  the  manager  or  enterpriser  they 
hope  to  save  his  profits  for  themselves.  Three  different 
kinds  of  co-operation  are  usually  distinguished:  (1)  dis- 
tributive or  consumers'  co-operation,  (2)  producers'  co- 
operation, and  (3)  financial  co-operation  for  credit,  bank- 
ing, etc.    We  may  take  these  up  in  turn. 

Consumers'  Co-operation  in  England 

Successful  consumers'  co-operation  may  be  said  to 
have  originated  in  Great  Britain  when  twenty-eight 
Rochdale  workingmen  founded  their  famous  society  of 
Equitable  Pioneers.  The  success  and  growth  of  this  re- 
markable experiment,  starting  in  1844  with  a  capital  of 
£28,  to  a  system  of  8,000  members,  with  a  capital  of  £200,- 
000  in  1874,  is  a  most  romantic  story.  It  was  largely  imi- 
tated and  retail  co-operative  stores  sprang  up  all  over 
England.    It  is  estimated  that  at  the  present  time  about 


168  Business  Economics 

a  third  of  the  population  of  England  is  supplied  through 
co-operative  stores,  and  that  these  stores  return  annually 
about  $60,000,000  into  the  pockets  of  the  workingmen. 
These  savings  are  often  used  to  build  homes,  and  thus  the 
co-operators  actually  *'eat  themselves  into  house  and 
home."  These  results  are  in  accord  with  the  ideals  of 
the  pioneers  of  the  movement,  who  were  more  than  store- 
keepers and  penny-savers.  They  were  noble-spirited 
men  who  looked  upon  the  co-operative  system  as  a  great 
workingmen 's  betterment  movement. 

English  co-operative  stores  soon  discovered  their  abso- 
lute helplessness  against  the  wholesaler  and  the  jobber. 
They  were  often  discriminated  against  and  always  felt 
that  these  distributors  constituted  another  group  of  mid- 
dlemen enterprisers  that  ought  to  be  eliminated.  In  re- 
sponse to  these  needs  and  feelings,  the  English  Co-Oper- 
ative  Wholesale  Society  was  organized  in  1864,  for  the 
purpose  of  joint  purchase  of  supplies  for  the  retail  co- 
operative stores.  It  effected  large  savings  and  was  suc- 
cessful from  the  beginning.  In  1911  the  English  Co-oper- 
ative Wholesale  Societies  reported  a  business  of  about 
$250,000,000.  The  Scottish  ^Vliolesale  Society  was  or- 
ganized upon  the  same  plan  and  has  been  equally  suc- 
cessful 

From  buying,  the  society  soon  passed  to  making  its 
own  goods  and  now  manufactures  a  long  list  of  commod- 
ities, thus  establishing  its  economic  independence  and 
completing  the  industrial  chain.  The  society  already 
owns  and  operates  the  largest  flour  mills  and  the  largest 
boot  and  shoe  factories  in  England.  These  factories  are 
owned  by  the  co-operative  society  as  the  enterpriser. 
They  are  not  conducted  upon  any  system  of  co-operative 
production,  but  work  just  as  any  other  capitalistic  plant 


Profit-Sharing  169 

would.    The  profits  go  to  the  co-operators  as  consumers, 
not  as  producers. 

Experiments  in  the  United  States 

In  the  United  States  experiments  of  this  kind  have  in 
general  had  only  a  brief  existence  thus  far.  It  is  impos- 
sible to  say  how  many  such  societies  exist  today,  as  no 
adequate  statistics  on  the  subject  exist.  Trade  union 
stores  in  New  England,  the  grange  stores  of  the  Patrons 
of  Husbandry,  and  later  similar  ones  of  the  Sovereigns 
of  Industry  show  what  has  been  attempted  along  one 
line.  Three  distinct  groups  of  consumers'  co-operative 
enterprises  which  have  been  more  or  less  a  success  should 
be  mentioned.  They  are  the  Zion's  Co-operative  Mer- 
cantile Institute,  of  Salt  Lake  City,  Utah,  which  is  both 
a  retail  and  wholesale  society,  under  the  control  of  the 
Mormons;  the  Rochdale  stores,  of  California,  with  the 
Rochdale  Wliolesale  Company,  of  San  Francisco;  and 
stores  established  under  the  auspices  of  the  Right  Re- 
lationship League  in  the  upper  Mississippi  Valley  states. 
The  reasons  for  the  lack  of  success  in  this  country  are 
not  hard  to  find.  Co-operation  requires  a  willingness  to 
take  considerable  trouble  for  small  economies,  which 
American  workingmen,  with  their  generally  high  wages, 
have  not  yet  been  willing  to  do.  It  also  requires  a  con- 
siderable degree  of  homogeneity  in  thought  and  interests 
on  the  part  of  a  people,  which  is  naturally  less  present  in 
the  United  States  with  its  large  admixture  of  foreign 
population  than  in  England  or  the  countries  of  Europe. 

Methods  of  Distribution 

The  methods  of  the  Rochdale  Society  will  serve  as  an 
illustration  of  the  way  in  which  the  savings  effected  by 


170  Business  Economics 

co-operation  are  distributed  among  the  members.  Any 
one  might  become  a  member  upon  payment  of  one  shil- 
ling and  was  then  entitled  to  trade  at  the  store.  The 
prices  charged  were  those  current  in  the  town,  but  purity 
of  goods  was  assured ;  cash  payments  were  an  essential 
feature.  At  the  end  of  the  year  the  profits  were  divided 
among  the  members  in  proportion  to  the  amount  of  their 
purchases.  On  the  other  hand  it  may  be  noted  that  no 
attempt  was  made  to  introduce  profit-sharing  with  the 
employes,  who  are  paid  ordinary,  but  good,  wages  only. 
In  general  the  plans  laid  down  by  this  original  society 
have  been  followed  by  all  successful  consumers'  co-oper- 
ative stores  in  whatever  place  or  country  they  may  be  lo- 
cated. This  sort  of  consumers'  co-operation  has  met 
with  considerable  success  in  continental  Europe  as  well. 
It  has  been  estimated  that  about  50,000,000  people  the 
world  over,  equal  to  half  the  population  of  the  entire 
United  States,  are  supplied  by  co-operative  retail  stores. 

Producers'  Co-operation 

Producers'  co-operation  differs  from  that  just  de- 
scribed in  that  it  is  a  union  on  the  part  of  laborers  to  do 
away  with  the  employer  and  to  secure  for  themselves  the 
profits.  The  object  of  the  first  is  to  lower  prices  for  the 
co-operators  as  consumers ;  the  object  of  the  second  is 
rather  to  secure  higher  prices  for  themselves  as  pro- 
ducers by  eliminating  the  profits  of  the  industrial  man- 
ager. They  hope  to  perform  his  function  by  their  col- 
lective effort  and  to  manage  as  well  as  to  labor;  indeed 
by  diminishing  friction  and  strikes  they  even  hope  to 
increase  the  profits.  Examples  of  successful  co-opera- 
tion of  this  sort  are  not  numerous,  as  it  has  great  diffi- 
culties with  which  to  contend.  Most  of  the  experiments 
have  failed,  though  recently  it  would  seem  that  the  move- 


Profit-Sharing  171 

ment  is  making  substantial  though  slow  progress,  espe- 
cially in  France  and  England.  Most  of  the  successful 
ventures  in  the  latter  country,  however,  seem  to  be  of 
simple  industries,  as  agriculture  and  dairy-farming. 

The  most  notable  example  of  successful  productive  co- 
operation in  the  United  States  has  been  furnished  by  the 
coopers  of  Minneapolis,  who  organized  a  shop  of  their 
own  in  1868  and  have  steadily  increased  their  business 
since  that  time.  Other  instances  often  cited  are  the 
wood-workers  in  St.  Louis  and  boot  and  shoe  companies 
in  Massachusetts.  More  recently  there  has  been  a  con- 
siderable extension  of  co-operative  creameries,  cheese 
factories,  and  similar  businesses  of  a  simple  kind.  Pro- 
ducers' Co-operative  Marketing  Societies  are  common  in 
agricultural  regions.  The  grain-growing  regions  usually 
have  their  co-operative  elevators  and  storehouses  and 
frequently  produce  exchanges.  The  largest  concern  of 
this  kind  is  the  California  Fruit  Growers  Exchange,  with 
a  membership  of  more  than  6,000  producers  and  an  an- 
nual business  of  more  than  $20,000,000. 

Financial  Co-operation 

In  a  system  of  credit  co-operation,  the  co-operators  de- 
sire to  benefit  themselves  by  the  use  of  their  combined 
capital  and  combined  credit,  which  are  used,  as  it  were, 
for  the  common  good  of  all.  The  forms  of  co-operative 
financial  societies  are  those  which  undertake  to  supply 
insurance  or  credit,  like  co-operative  insurance  compa- 
nies, co-operative  banks,  co-operative  credit  societies, 
and  building  and  loan  associations.  Co-operative  fire  in- 
surance companies  and  building  and  loan  associations 
have  been  quite  successful  in  the  United  States,  but  credit 
insurance  has  been  neglected.  The  latter  branch  is  re- 
ceiving a  great  deal  of  attention  at  the  present  time,  and 


172  Business  Economics 

we  may  look  for  progress  along  this  line  within  the  next 
few  years.  The  economic  possibilities  of  such  credit  as- 
sociations are  well  illustrated  from  some  of  the  German 
societies  which  have  become  strong  enough  to  go  into  the 
national  money  markets  for  their  loans.  Their  securities 
have  often  sold  at  better  figures  than  government  bonds. 
These  savings  are  secured  for  the  benefit  of  the  individ- 
ual borrowers  of  the  society.  Such  societies  perhaps 
cannot  exist  without  special  legislation  in  their  behalf. 

Advantages  of  Co-operation 

The  advantages  of  co-operation  are  summed  up  as  fol- 
lows by  Professor  Walker.^  From  the  laborer's  point  of 
view : 

First,  to  secure  for  the  laboring  class  that  large  amount  of 
wealth,  which  *  *  *  goes  annually  in  profits  to  the  em- 
ployer. Second,  to  secure  for  the  laborer  the  opportunity  to 
produce  independently  of  the  will  of  an  employer.  *  *  *  In 
addition  to  these,  the  political  economist  beholds  in  co-operation 
three  sources  of  advantage.  First,  co-operation  would,  by  the 
very  terms  of  the  case,  do  away  with  strikes.  *  *  *  Second, 
the  workman  would  be  incited  to  greater  industry  and  to  great- 
er carefulness  in  dealing  with  materials  and  with  machinery. 
Third,  in  no  small  degree  frugality  would  be  encouraged. 

To  these  may  be  added  other  advantages,  mostly  real- 
izable, however,  in  consumers'  co-operation.  Saving  in 
store-room,  clerk  hire,  advertising,  bookkeeping,  etc.,  is 
effected,  while,  above  all,  the  practice  of  cash  payments 
saves  all  loss  from  bad  debts.  The  initial  success  of  the 
Rochdale  pioneers  was  due  in  large  part  to  the  economy 
in  this  line,  as  a  system  of  long  credits  burdened  the  re- 

4  Political  Economy,  pp.  344,  345. 


Profit-Sharing  173 

tail  trade  of  England  at  the  time  they  began.  In  this 
country  the  large  department  stores  have  introduced 
this  system  and  have  thus  been  able  to  give  their  cus- 
tomers lower  prices  and  to  that  extent  have  lessened  the 
motive  for  consumers'  Co-operation.  The  educative  ef- 
fect of  successful  co-operation  upon  the  participators  in 
developing  habits  of  thrift,  careful  management,  and  a 
knowledge  of  business  principles,  is  one  of  the  chief  ad- 
vantages of  the  system. 

The  ultimate  ideal  of  enthusiastic  co-operators  does 
not,  however,  stop  short  at  a  mere  saving  in  price.  The 
goal  is  stated  as  follows  by  the  Right  Relationship 
League  of  America,  which  has  several  co-operative 
stores  in  the  Northwest:  Consumers'  co-operation  is 
merely  the  first  step  which  'Svill  lead  next  to  co-operative 
production,  next  to  public  ownership  of  natural  resources 
and  finally  to  complete  industrial  and  economic  equality, 
social  and  political  right  relationship — the  Kingdom  of 
God  on  Earth." 

Disadvantages  of  Co-opeeation 

The  defects  of  co-operation  have  already  been  sug- 
gested in  the  account  of  their  failure.  In  the  first  place 
the  importance  and  need  of  intelligent  and  efficient  man- 
agement are  usually  underrated  by  workingmen.  They 
are  unwilling  to  pay  high  salaries  and  as  a  consequence 
lose  the  best  men  and  secure  inefficient  service.  Co-oper- 
ation has  therefore  succeeded  best  in  retail  trade  where 
the  processes  are  comparatively  simple,  or  in  those 
branches  of  production  where  industry  counts  for  most 
and  management  for  least.  But  even  if  it  were  possible 
to  secure  an  efficient  and  progressive  manager  for  a  co- 
operative shop,  it  is  found  very  difficult  for  a  man  chosen 
by  the  workmen  to  enforce  discipline  among  them.     A 


174  Business  Economics 

second  disadvantage  is  the  difficulty  of  securing  capital. 
Where,  as  in  many  branches  of  large-scale  manufactur- 
ing today,  the  average  investment  of  capital  amounts  to 
more  than  $1,000  per  employe,  the  impossibility  of  ob- 
taining this  by  the  contributions  of  the  workers  is  ob- 
vious. Nor  are  capitalists  usually  willing  to  lend  to  such 
organizations,  as  the  risks  are  too  great.  To  meet  this 
difficulty  Ferdinand  Lassalle,  a  German  socialist,  pro- 
posed that  the  state  should  advance  the  necessary  capital 
to  associations  of  workmen.  But  the  experience  so  far 
with  productive  co-operation  would  seem  to  suggest  that 
the  social  benefits  would  not  equal  the  waste  of  public 
capital.  There  is  danger  also  that  if  successful  the  co- 
operative associations  would  tend  to  become  monopolies ; 
they  are  profit-seeking  societies  and  would  probably  not 
differ  materially  in  their  methods  from  ordinary  joint 
stock  enterprises. 

It  seems  impossible,  therefore,  to  expect  from  co-oper- 
ation a  final  solution  of  the  labor  problem,  such  as  John 
Stuart  Mill,  for  instance,  hoped  for.  Where  successful, 
however,  it  has  succeeded  in  distributing  profits  among  a 
larger  number  of  persons  than  would  otherwise  have  re- 
ceived them.  Its  educative  and  moral  effects,  too,  in  the 
appeals  which  it  makes  to  higher  motives  and  to  char- 
acter, are  of  the  highest  value.  But  as  an  industrial  sys- 
tem of  enterprise  it  cannot  supplant  the  present  system 
so  long  as  the  manager  of  industry  is  needed.  Today 
he  performs  a  useful  social  service  and  profits  are  his 
pay  therefor.  If  he  is  to  be  eliminated,  society  must  first 
be  raised  to  a  higher  plane  of  efficiency,  intelligence,  and 
morality.  But  just  because  it  makes  these  high  demands 
upon  the  members  of  the  laboring  class,  attempts  at  co- 
operation should  receive  all  reasonable  encouragement. 


Profit-Sharing  lib 

TEST  QUESTIONS 

1.  What  is  meant  by  profit-sharing? 

2.  What  is  the  chief  purpose  of  profit-sharing? 

3.  What  are  the  three  principal  methods  of  profit-sharing? 

4.  What  objections  are  raised  against  profit-sharing  ? 

5.  What  is  the  system  of  profit-sharing  used  by  the  United 
States  Steel  Corporation? 

6.  According  to  President  Hadley,  under  what  conditions 
does  profit-sharing  have  its  greatest  chances? 

7.  How  does  co-operation  dilfer  from  profit-sharing? 

8.  To  what  extent  has  consumers'  co-operation  developed  in 
England  ? 

9.  How  are  profits  distributed  under  the  Rochdale  method  of 
consumers'  co-operation? 

10.  To  what  extent  does  consumers'  co-operation  exist  in  the 
United  States?    Give  a  few  prominent  examples. 

11.  What  is  meant  by  producers'  co-operation?  Give  a  few 
examples.  Why  is  producers'  co-operation  less  successful  than 
consumers'  co-operation? 

12.  To  what  extent  has  financial  co-operation  developed  in 
Germany?     In  the  United  States?     Why  are  we  backward? 

13.  What  are  the  chief  advantages  and  disadvantages  of  co- 
operation ? 

14.  What  is  the  ultimate  ideal  of  enthusiastic  co-operators? 


CHAPTER  XIII 
money  and  banking 

Credit  Economy 

Probably  on  no  subject'  has  there  been  such  confused 
thinking  or  have  such  widely  varying  vieAvs  been  held  as 
on  that  of  money.  There  is,  however,  substantial  una- 
nimity of  opinion  on  the  important  points  among  econo- 
mists today,  though  in  practice  there  still  remain  many 
unsolved  problems.  The  modern  industrial  system  has 
already  been  characterized  as  one  of  capitalistic  produc- 
tion, of  large-scale  enterprises  with  extended  use  of  ma- 
chinery. Not  less  fundamental  are  the  processes  of  val- 
uation and  exchange  made  possible  by  the  use  of  money 
and  credit ;  and  also  by  the  machinery  for  the  geograph- 
ical distribution  of  goods  by  our  railroads  and  steamship 
lines. 

The  modern  stage  of  economic  development  has  been 
described  by  Hildebrand  as  one  of  credit  economy,  as 
opposed  to  those  of  barter  and  money  economy  which 
preceded.  It  is  inconceivable  that  the  modern  complex 
system  of  exchange  could  be  maintained  without  the  ex- 
tended use  of  money  and  credit.  Without  attempting  to 
define  these  terms  or  to  trace  their  historical  develop- 
ment, we  may  proceed  at  once  to  state  some  of  the  prob- 
lems to  which  they  have  given  rise. 

176 


Money  and  Banking  111 

Value  of  Money 

The  first  question  that  suggests  itself  is :  Wliat  deter- 
mines the  value  of  money?  The  generally  accepted  an- 
swer may  be  briefly  stated :  The  value  of  money  de- 
pends, other  things  remaining  the  same,  upon  its  quan- 
tity. According  to  the  quantity  theory  an  increase  in  the 
supply  of  money  will  cause  a  fall  in  the  value  of  each 
unit,  just  as  an  increase  in  the  supply  of  wheat  or  cotton 
will  cause  a  fall  in  the  value  of  each  bushel  or  bale.  Con- 
versely, a  decrease  in  the  quantity  of  money  will  cause 
a  rise  in  the  value  of  money.  It  is  simply  an  application 
of  the  general  law  of  value  to  money.  The  phrase  ' '  other 
things  remaining  the  same"  is  an  important  one,  for  it 
assumes  that  the  amount  of  business  and  the  methods  by 
which  it  is  conducted  will  remain  substantially  un- 
changed. Of  course  if  an  increase  in  the  amount  of  money 
is  accompanied  by  an  equivalent  expansion  of  trade,  the 
one  may  offset  the  other  and  the  value  of  money  remain 
unchanged. 

Now  inasmuch  as  the  prices  of  all  goods  and  services 
are  measured  and  expressed  in  terms  of  money,  it  is  clear 
that  a  fall  in  the  value  of  money  means  a  rise  of  general 
prices ;  the  value  of  each  commodity  is  now  expressed  in 
terms  of  a  larger  number  of  less  valuable  units  or  dollars. 
Prices  will  be  high  if  the  quantity  of  money  in  circulation 
in  a  country  is  large;  they  will  be  low  if  the  quantity  is 
small.  Whicli  is  better  for  a  country,  high  prices  or  low 
prices?  To  this  question  it  may  be  answered  that  it  is  a 
matter  of  indifference,  provided  only  that  there  is  enough 
money  to  do  the  work  of  exchange  efficiently  and  that 
fluctuations  are  prevented.  Just  how  much  constitutes 
enough  is,  however,  a  matter  of  contention.  In  the  unde- 
veloped sections  of  our  country,  where  capital  is  scarce 


178  Business  Economics 

and  banking  facilities  undeveloped  and  where  most  of 
the  people  are  debtors,  there  has  always  been  a  demand 
for  cheap  and  abundant  money.  Capital  and  money  have 
been  confused  and  the  need  of  one  has  led  to  a  demand  for 
the  other. 

Rising  and  Falling  Prices 

It  is  not  a  matter  of  indifference,  however,  whether 
prices  are  rising  or  falling,  that  is,  whether  inflation  or 
contraction  of  the  currency  is  taking  place.  A  period  of 
falling  prices  means  hardship  and  injustice  to  debtors 
and  producers  of  goods,  such  as  farmers,  manufacturers, 
etc.  Having  contracted  obligations  and  engaged  in  the 
production  of  commodities  with  the  expectation  of  a 
given  price,  they  find  their  goods  worth  less  when  ready 
for  the  market  and  as  a  result  they  are  confronted  with 
a  loss  instead  of  the  anticipated  profit.  Under  such 
circumstances  a  contraction  of  the  currency  and  falling 
prices  mean  lessened  production  of  wealth.  Consequently 
many  writers,  and  even  so  good  an  economist  as  Presi- 
dent Walker,  have  urged  that  a  slow  steady  inflation  of 
the  currency  would  promote  trade  and  ''give  a  fillip  to 
industry."  The  monetary  history  of  the  United  States 
is  filled  with  attempts  to  realize  this  in  practice.  Colo- 
nial and  revolutionary  bills  of  credit  were  first  issued; 
when  these  were  forbidden  by  the  new  Constitution  re- 
sort was  had  to  issues  by  state  banks.  When  the  federal 
government  began  the  issue  of  greenbacks  and  restricted 
the  use  of  state  bank  notes,  the  inflationists  looked  to  this 
source  for  assistance.  After  the  defeat  of  the  Greenback 
party,  they  turned  finally  to  the  coinage  of  silver,  which 
was  now  falling  in  price,  and  the  question  of  bimetallism 
in  the  United  States  was  made  a  practical  political  issue. 


Money  and  Banking  179 

Bimetallism 

Down  to  1870  practically  all  tlic  nations  of  Europe  and 
America  had  the  system  of  bimotallism  at  ratios  of  ISVo 
or  16  to  1.  About  that  date  the  great  increase  in  the  sup- 
ply of  gold  and  the  fall  in  the  value  of  silver  led  one 
country  after  another  to  abandon  the  latter  and  to  adopt 
the  system  of  gold  monometallism.  This  was  vigorously 
resisted  by  many  persons  and  several  fruitless  efforts 
were  made  to  secure  a  system  of  international  bimetal- 
lism. Failing  in  that,  the  friends  of  silver  in  this  country 
endeavored  to  secure  independent  action  by  the  United 
States  alone,  and  were  ultimately  successful  in  obtaining 
the  purchase  by  the  federal  government,  for  coinage  pur- 
poses, of  practically  the  entire  silver  output  of  the  coun- 
try during  the  years  1878-1893. 

The  arguments  in  favor  of  bimetallism  are  as  various 
as  the  motives  of  its  advocates,  but  two  or  three  of  the 
more  important  ones  may  be  briefly  stated.  It  is  urged 
because  it  would  give  a  more  stable  measure  of  value  than 
either  silver  or  gold  alone  could  do;  and  the  evil  effects 
of  fluctuations  in  the  value  of  gold  since  1873  are  pointed 
out  to  illustrate  this  contention.  Monometallists  answer 
this  by  asserting  that  most  of  the  price  changes  can  be 
accounted  for  by  improvements  in  production ;  that  even 
if  they  were  caused  by  a  contraction  of  the  currency,  this 
was  simply  one  of  the  risks  of  business ;  and  finally  that 
the  evil  effects  of  falling  prices  are  offset  by  a  corre- 
sponding reduction  in  interest  rates. 

A  second  argument  of  the  bimetallists  was  the  alleged 
insufficiency  of  gold  on  which  to  do  the  world's  business. 
As  this  has  been  practically  met  by  the  phenomenal  in- 
crease in  gold  production  in  the  last  decade,  especially 
since  the  gold  discoveries  in  Alaska,  it  is  not  necessary 


180  Business  Economics 

to  dwell  upon  this  argument.  On  January  2, 1915,  the  per 
capita  circulation  of  money  in  the  United  States  reached 
$35.50,  the  highest  point  in  our  history.  A  final  argument 
of  the  bimetallists  concerns  foreign  trade.  Bimetallism 
would  facilitate  this  by  establishing  a  fixed  par-of-ex- 
change  between  all  countries.  While  the  weight  of  this 
may  be  admitted,  it  has  been  practically  deprived  of  all 
force  because  of  the  adoption  of  the  gold  standard  by 
virtually  all  the  industrially  developed  nations  of  the 
world.  This  last  fact  shows  that  the  question  has  now 
been  actually  settled  by  the  logic  of  events  and  today  the 
issue  of  bimetallism  has  only  an  academic  interest. 

Government  Paper  Money 

Another  problem  connected  with  money  which  has  been 
removed  from  the  arena  of  oratory  to  that  of  calm  dis- 
cussion is  that  of  government  paper  money.  It  is  urged, 
with  much  truth,  that  if  a  nation  issued  paper  money 
instead  of  gold  or  silver,  it  would  save  all  the  expense  of 
mining  these  metals.  It  would  resemble,  as  Adam  Smith 
said,  the  discovery  of  wagon  roads  through  the  air  in 
the  realm  of  transportation. 

Another  argument  advanced  in  favor  of  government 
paper  money  is  that  it  would  be  possible  by  a  scientific 
adjustment  of  the  issues  to  regulate  the  amount  of  money 
in  circulation  and  so  to  prevent  all  fluctuations  in  prices. 
Both  contraction  and  inflation  w^ould  be  prevented  and  a 
cheap  and  yet  ideal  system  of  money  would  exist.  Still 
others  see  in  this  form  of  money  an  instrument  for  the 
creation  of  wealth;  this  last  argument  simply  results 
from  a  confusion  of  ideas  and  need  not  be  dealt  with. 

A  sufficient  answer  to  the  other  two  is  an  appeal  to  the 
lesson  of  history.  No  government  which  has  embarked 
upon  the  issue  of  paper  money  has  ever  been  able  to 


Money  and  Banking  181 

restrict  the  issues  within  reasonable  limits;  often  it  has 
led  to  national  bankruptcy  and  the  repudiation  of  the 
entire  issues.  The  experience  of  the  United  States  with 
the  greenbacks  has  been  more  fortunate  than  that  of 
many  countries,  but  does  not  tempt  to  further  experi- 
ment. 

Kinds  of  Money  in  the  United  States 

The  monetary  situation  in  the  United  States  today 
may  be  regarded  as  fairly  well  settled.  Although  we  have 
a  very  heterogeneous  assortment  of  different  kinds  of 
money,  a  fairly  distinct  sphere  is  allotted  to  each,  and  as 
the  basis  for  all,  the  gold  standard  has  been  definitely 
established  by  law.  Money  of  large  denominations  con- 
sists of  gold  and  gold  certificates  (lowest  denomination, 
$10),  of  Federal  Reserve  notes,  of  greenbacks  and  na- 
tional bank  notes  (lowest  denomination,  $10,  though  one- 
third  of  bank  notes  may  be  $5) ;  the  needs  of  retail  trade 
are  met  by  the  issue  of  silver  certificates  and  silver  dol- 
lars, and  of  fractional  currency.  The  system  would  be 
much  simplified  by  the  retirement  and  destruction  of  the 
$346,000,000  in  greenbacks,  but  as  there  is  now  50  per  cent 
reserve  in  gold  back  of  them,  little  danger  need  be  appre- 
hended from  their  presence.  Many  people  have  regarded 
the  existence  of  some  $500,000,000  worth  of  silver  dollars 
as  a  menace  to  the  goodness  of  our  money  supply,  but  as 
the  amount  of  gold  in  circulation  increases,  the  silver  will 
form  a  constantly  smaller  percentage  of  the  whole.  It  is 
a  cumbersome  and  not  very  valuable  asset  of  the  nation, 
but  is  now  almost  powerless  for  good  or  ill. 

The  Function  of  Credit 

Important  as  is  the  subject  of  money  and  essential  as 
is  the  need  of  a  standard  of  undoubted  goodness,  it  is 


182  Business  Economics 

overshadowed  in  practical  significance  by  the  problems  of 
banking  and  credit.  An  investigation  by  the  Comptroller 
of  the  Currency  some  years  ago  showed  that  over  90  per 
cent  of  the  receipts  of  the  national  banks  consisted  of 
credit  instruments,  while  probably  60  per  cent  of  the 
trade  of  the  country  was  carried  on  by  credit  rather  than 
by  cash  transactions.  A  credit  transaction  is  a  transfer 
of  goods  or  money  for  a  future  equivalent ;  the  element  of 
time  is  introduced.  This  makes  possible  an  enormous  in- 
crease in  the  number  of  exchanges  and  obviates  the  ne- 
cessity, to  a  large  extent,  of  using  money.  Most  of  us 
enjoy  personal  credit,  which  is  limited  only  by  our  ability 
to  persuade  other  people  to  trust  in  us.  But  this  power 
of  purchasing  things  without  immediate  payment  must 
be  made  readily  available  if  the  ordinary  business  man  is 
to  make  use  of  it.  This  is  done  through  the  medium  of 
a  bank,  whose  business  it  is  to  discount  the  notes  of  its 
customers,  which  in  turn  is  based  upon  confidence  in  their 
prospective  earnings.  The  bank  credit  thus  obtained 
may  be  transferred  by  means  of  checks  to  other  persons 
and  to  other  banks.  It  is  the  most  fluid  and  volatile 
means  of  payment  yet  devised,  and  is  subject  to  dangers 
and  abuses.  In  the  last  analysis  business  based  upon 
such  a  system  of  credit  rests  upon  confidence  in  the  hon- 
esty of  individuals  and  in  the  enforcement  of  the  law 
governing  contracts,  and  also  in  the  ability  of  those  who 
have  pledged  themselves  to  future  payment  to  make  good 
their  obligations.  In  times  of  panic  credit  fails  and  re- 
sort is  had  to  money. 

Banks 

The  fundamental  institution  in  our  credit  economy  is 
the  bank,  and  it  is  therefore  essential  that  it  be  thor- 
oughly safe  and  responsive  to  the  needs  of  the  business 


Money  and  Banking  183 

world.  A  bank  may  furnish  its  customers  with  the  ready 
means  of  payment  they  need  in  exchange  for  their  future 
promises  either  in  the  form  of  bank  notes  or  bank  credit. 
The  former  are  more  largely  used  on  the  continent  of 
Europe  and  in  rural  districts  in  this  country,  the  latter 
by  England  and  the  United  States,  especially  in  the 
cities.  The  preference  for  one  or  the  other  seems  to  be 
a  matter  of  geography. 

Elasticity  of  Currency 

The  issue  of  bank  notes,  which  Avas  confined  to  the  na- 
tional banks,  has  always  been  very  carefully  safeguarded 
since  the  establishment  of  the  national  banking  system  in 
1863.  Under  this  system  every  national  bank,  upon  its 
organization,  was  compelled  to  buy  government  bonds 
and  was  then  permitted  to  issue  bank  notes  up  to  the  par 
value  of  these  bonds.  These  notes  were  consequently  ab- 
solutely safe,  but  they  lacked  one  essential  quality  of 
good  bank  money  in  that  they  were  quite  inelastic.  That 
is  to  say,  the  amount  of  bank  notes  did  not  vary  according 
to  the  needs  of  business,  increasing  to  meet  an  increased 
demand,  as  at  crop-moving  time,  and  then  declining  again 
when  the  demand  had  passed ;  but  being  based  upon  gov- 
ernment bonds,  they  varied  with  the  amount  of  the  na- 
tion's indebtedness,  and  even  then  only  very  slowly. 
There  was  no  immediate  connection  between  the  volume 
of  bank  notes  and  of  business  needs. 

The  main  practical  problem  connected  with  our  bank- 
ing system  therefore  seemed  to  be  the  finding  of  some 
other  basis  for  the  issue  of  bank  notes.  Various  plans 
were  suggested,  as  the  establishment  of  a  central  bank 
with  sole  power  of  issue,  like  the  government  banks  in 
European  countries  or  the  Canadian  system  of  branch 
banking,  but  Congress  could  not  agree  upon  a  measure. 


184  Business  Economics 

In  1908  however  a  step  forward  was  taken  by  permit- 
ting national  banks  to  issue  additional  notes  upon  de- 
posit of  approved  bonds  and  securities  other  than  govern- 
ment bonds.  This  gave  some  elasticity  to  the  system  but 
was  avowedly  only  a  compromise  measure  and  will  ex- 
pire on  June  30,  1915.  Finally  by  act  of  December  23, 
1913,  an  entirely  new  system  of  banking  was  introduced 
under  the  name  of  the  Federal  Eeserve  System.  It  went 
into  effect  on  November  16,  1914.  The  main  features  of 
the  new  system  are  set  forth  in  the  following  paragraphs. 

The  Federal  Reserve  System 

The  country  is  di\dded  into  twelve  regions  in  the  prin- 
cipal cities  of  which  regional  reserve  banks  are  to  be 
established.  These  regional  reserve  banks  are  aptly  desig- 
nated '* bankers'  banks."  Their  capital  will  be  supplied 
for  the  most  part  by  the  member  banks,  Avhich  are  all  the 
national  banks  in  each  district,  and  such  state  and  other 
banks  as  may  care  to  join  the  system.  These  reserve 
banks  will  do  business  only  -with  the  member  banks,  per- 
forming various  services  for  them,  which  marks  a  new 
departure  in  our  banking  practice.  One  of  these  is  redis- 
counting  notes  and  acceptances  held  by  the  member  banks 
which  are  based  upon  commercial  transactions,  import 
and  export  business,  and  to  a  limited  extent  upon  real 
estate.  Another  is  the  keeping  of  fixed  percentages  of 
the  legal  cash  reserves  of  the  member  banks.  Under  the 
old  national  banking  system  these  reserves  tended  to  be 
concentrated  in  New  York  City  and  in  that  city  in  about 
twenty  banks.  This  massing  of  reserves  stimulated  stock 
exchange  speculation,  as  much  of  it  was  loaned  to  spe6u- 
lators  on  call,  and  made  it  difficult  for  the  country  banks 
to  recall  their  reserves  in  time  of  panic  or  special  need. 
Under  the  new  system  the  cash  reserves  of  the  7,500  na- 


Money  and  Banking  185 

tional  banks  are  distributed  in  twelve  regional  reserve 
banks  scattered  widely  over  the  whole  country. 

Asset  Currency 

The  most  important  change  introduced  is  the  creation 
of  an  asset  currency  instead  of  a  bond-secured  currency. 
Federal  Reserve  notes  are  to  be  issued  to  member  banks, 
secured  by  an  equal  amount  of  commercial  paper  ac- 
cepted for  rediscount.  The  volume  of  such  notes  out- 
standing will  consequently  vary  with  the  amount  of  bank 
loans,  that  is,  with  the  needs  of  business.  Against  these 
notes  the  banks  must  keep  a  40  per  cent  reserve  in  gold 
for  purposes  of  redemption.  Provision  is  also  made  for 
the  gradual  retirement  of  the  old  bond-secured  national 
bank  notes.  Finally,  strict  governmental  control  is  pro- 
vided for  through  the  establishment  of  a  Federal  Reserve 
Board,  made  up  of  the  Secretary  of  the  Treasury,  the 
Comptroller  of  the  Currency,  and  five  others  to  be  ap- 
pointed by  the  President. 

Savings  Banks 

So  far  we  have  been  discussing  commercial  banks,  but 
there  is  another  kind  of  institution  which  goes  by  the 
same  name  but  serves  quite  a  different  purpose,  namely, 
the  savings  banl^.  The  essential  and  almost  the  only  re- 
quirement of  such  an  institution  is  safety.  As  we  have 
seen,  it  is  not  only  desirable,  for  personal  reasons,  to  in- 
culcate habits  of  saving  and  thrift  in  individuals,  but  it 
is  also  necessary  to  secure  the  accumulation  of  capital" 
needed  in  modern  industry.  It  is  therefore  important 
that  such  institutions  should  be  widespread,  accessible, 
and  thoroughly  tnisted.  These  requirements  are  well 
fulfilled  by  postal  savings  banks  now  in  operation  in  all 
the  leading  countries.     Such  banks  accept  very  small 


186  Business  Economics 

savings  accounts,  and  often  do  not  carry  any  large  single 
items.  But  due  to  the  fact  that  they  possess  the  confi- 
dence of  the  people  and  appeal  to  millions  of  small 
savers,  they  have  led  to  a  great  increase  in  savings  and 
deposits  wherever  they  have  been  established.  On  Sep- 
tember 12,  1914,  the  deposits  in  the  postal  savings  banks 
amounted  to  about  $28,000,000. 

TEST  QUESTIONS 

1.  What  is  meant  by  the  establishment  of  modern  business 
on  a  credit  basis? 

2.  What  determines  the  value  of  money? 

3.  What  is  the  effect  of  an  increased  supply  of  money  on  the 
prices  of  commodities?    Of  a  decreased  supply  of  money? 

4.  Why  does  a  new  community  usually  clamor  for  cheap 
money,  while  an  old  and  established  community  prefers  a  scarcity 
of  money? 

5.  What  effect  does  a  period  of  falling  prices  have  upon 
debtors  ?     Why  ? 

6.  Why  did  the  agricultural  people  of  the  western  states 
strongly  favor  bimetallism  during  the  years  1890-1896? 

7.  Would  it  be  possible  for  our  government  to  resort  entirely 
to  a  paper  money  basis?    Why? 

8.  What  are  the  chief  kinds  of  money  now  used  in  the  United 
States? 

9.  What  are  the  principal  functions  of  a  bank  in  our  present 
system  of  credit  economy? 

10.  What  is  meant  by  elasticity  of  the  currency?  How  may 
'it  be  secured? 

11.  What  is  meant  by  asset  currency? 

12.  Explain  the  currency  system  established  under  the  Fed- 
eral Reserve  plan. 


CHAPTER  XIV 
transportation  and   communication 

Monopolistic  Nature  of  Transportation  Service 

Almost  as  important  for  the  conduct  of  modern  indus- 
try as  machine  methods  and  credit  are  the  rapid  means 
of  transportation  and  communication  furnished  by  our 
railroad,  steamship,  express,  post-office,  telegraph,  and 
telephone  systems.  Indeed  the  development  of  industry 
on  a  national  scale  and  its  integration  under  centralized 
control  have  been  made  possible  only  by  these  improve- 
ments. 

But  not  only  have  these  businesses  rendered  the  cen- 
tralization of  industry  possible ;  they  themselves  exhibit, 
on  a  national  scale,  concentration  of  control.  They  are 
all  industries  of  increasing  returns  and  lend  themselves 
naturally  to  monopolistic  control.  At  the  very  beginning 
of  railroad  construction  one  of  the  most  far-sighted  man- 
agers enunciated  the  doctrine  that  ''where  combination 
is  possible  competition  is  impossible."  For  years  com- 
petition was  regarded  as  the  regulator  of  rates,  pooling 
between  railroads  was  forbidden,  and  canals  were  advo- 
cated as  competitors.  By  every  possible  device  it  was 
sought  to  stimulate  competition.  We  are  at  last  begin- 
ning to  recognize  the  monopoly  character  of  the  railroad 
industry  and  to  regulate  it  accordingly. 

187 


188  Business  Economics 

Railroad  Consolidation 

Consolidation  in  the  railroad  world  is  not  a  new  phe- 
nomenon nor  is  it  confined  to  that  industry,  but  it  has 
proceeded  further  there  than  in  any  other  line  of  busi- 
ness. The  first  form  which  combination  took  was  that  of 
pooling,  according  to  which  the  traffic  was  pooled  and  the 
earnings  then  divided  among  the  companies  entering  into 
the  pool  according  to  some  previous  agreement.  This 
was  forbidden  by  the  Interstate  Commerce  Act  in  1887 
and  even  more  stringently  by  the  Anti-Trust  Act  of  1890, 
and  accordingly  railroad  managers  next  resorted  to  ac- 
tual consolidation  of  competing  lines.  Where  this  has 
not  been  possible  or  desirable,  virtual  combination  has 
been  secured  by  the  so-called  "community  of  interests" 
arrangements,  based  on  the  acquisition  hj  one  road  of 
enough  stock  in  competing  lines  to  secure  representation 
on  their  boards  of  directors. 

Today  some  five  or  six  groups  of  capitalists  control 
over  two-thirds  of  the  railway  mileage  of  the  United 
States.  The  late  Mr.  E.  H.  Harriman  was  credited  with 
controlling,  directly  or  indirectly,  a  system  aggregating 
over  67,000  miles.  These  great  consolidations  have  fol- 
lowed mainly  the  territorial  groupings  of  railroads ;  the 
United  States  has  now  been  districted  out  by  a  few  large 
transportation  companies,  much  as  France,  Italy,  Eng- 
land, and  other  European  countries  had  previously  been 
divided  up.  Consolidation  has  in  many  instances  resulted 
in  increased  convenience  to  the  public  and  in  economies 
in  management  and  operation,  but  it  places  a  dangerous 
amount  of  power  in  the  hands  of  a  few  men,  which  has 
not  infrequently  been  abused  and  should  clearly  be  under 
strict  government  control. 


Transportation  189 

Railroad  Rates 

The  primary  economic  problem  comiected  with  rail- 
ways is  always  the  question  of  rates.  This  has  been 
called  in  a  recent  book  "the  heart  of  the  railroad  prob- 
lem." The  first  fact  that  strikes  the  student  of  the  sub- 
ject is  the  great  reduction  in  rates  and  fares  in  the  past 
twenty-five  years,  especially  in  freight  rates.  From  1.24 
cents  in  1882  the  average  revenue  per  ton  mile  received 
by  railroads  in  the  United  States  has  decreased  to  .733 
cents  in  1914.  Freight  rates,  especially  through  rates  for 
bulky  traffic,  are  considerably  lower  in  this  country  and 
passenger  fares  are  somewhat  higher  than  those  in  effect 
in  Europe. 

But  the  vital  problem  connected  with  rates  is  not  as 
to  their  relative  cheapness  or  extortionateness ;  it  con- 
cerns rather  the  granting  of  discriminating  rates.  Dis- 
criminations may  be  of  three  kinds:  (1)  those  between 
different  classes  of  goods,  (2)  those  between  localities, 
and  (3)  those  between  persons. 

The  first  group  is  based  upon  the  classification  of 
freight  and  rests  upon  differences  in  cost  of  shipment,  in 
bulk,  in  risk,  etc.  If  reasonably  employed,  this  kind  of 
discrimination  is  justifiable.  Local  discriminations,  that 
is,  charging  different  rates  to  different  localities  for  sub- 
stantially the  same  service,  are  not  only  unwarranted  in 
most  cases,  but  are  shortsighted  as  well.  Where  superior 
facilities  or  especially  keen  competition  exists,  lower 
rates  may  be  permitted  for  favored  localities,  but  the  ar- 
bitrary exercise  of  such  powers  by  railway  officials  is 
thoroughly  unjustifiable.  Even  less  defensible  is  the 
practice,  now  happily  less  frequent,  of  graTiting  discrim- 
inatory rates  to  favored  individuals  or  corporations. 
They  have  been  given  by  means  of  secret  rates  and  re- 


190  Business  Economics 

bates,  by  under-billing  and  under-classification,  by  free 
passes,  etc.  Both  of  these  latter  evils  have  been  forbid- 
den or  greatly  restricted  by  the  passage  of  the  Interstate 
Commerce  Act  in  1887  and  by  subsequent  legislation. 

Governmental  Regulation  of  Raileoads 

The  public  nature  of  railroads  is  now  fairly  well  recog- 
nized in  our  law  and  is  beginning  to  be  understood  by  the 
people  at  large.  Railroads  enjoy  peculiar  privileges  in 
the  grant  of  corporate  franchises  and  charters,  in  the 
right  of  eminent  domain,  and  in  enormous  grants  of  land 
and  money  which  have  been  made  to  them  in  this  country. 
Moreover,. the  social  character  of  their  duties  is  empha- 
sized in  the  functions  they  perform,  and  they  are  under 
the  necessity  of  maintaining  a  constant  service  open  to 
all.  Though  they  are  owned  by  private  investors  and 
managed  as  private  enterprises,  they  are  essentially  pub- 
lic enterprises  as  to  their  privileges,  functions,  and  du- 
ties. Consequently  most  of  the  states  have  now  under- 
taken, through  commissions,  to  regulate  the  railroads  in 
the  public  interest.  These  state  commissions  differ  in 
power.  Some  have  mandatory  powers,  that  is,  powers  to 
prescribe  and  enforce  maximum  rates,  while  others  have 
only  supervisory  powers  of  investigation  and  report. 
Some  act  only  upon  complaint,  while  others  act  both  upon 
complaint  and  upon  their  own  initiative.  In  many  states 
this  power  has  been  given  to  a  state  public  utility  com- 
mission, which  has  control  over  all  public  utilities  within 
the  state. 

While  the  state  commissions  have  done  and  are  doing 
valuable  service,  it  is  clear  that  the  growth  of  giant  rail- 
road combinations  which  traverse  several  states  necessi- 
tates federal  control.  The  appointment  of  the  Interstate 
Commerce  Commission  in  1887  established  the  principle 


Transportation  191 

of  federal  regulation,  which  has  been  slowly  extended, 
until  today  the  commission  has  extensive  powers  over 
railroads,  including  the  control  of  rates. 

Public  Ownership 

Owing  to  the  individualistic  character  of  our  institu- 
tions and  law,  public  ownership  of  railroads  does  not 
exist  in  the  United  States,  which  thus  forms,  together 
with  England,  almost  the  sole  important  exception  to  the 
world's  practice  in  this  regard.  On  the  continent  of  Eu- 
rope government  ownership  is  the  rule.  Public  control 
through  either  o^\^lership  or  regulation  by  commission 
is  essential  in  order  to  secure  an  equitable  adjustment  of 
public  and  private  rights  and  to  prevent  the  abuse  of 
monopoly  power  inherent  in  the  very  nature  of  railroads. 
Public  ownership  has  many  advantages  and  has  given 
satisfactory  results  in  Europe.  But  for  the  United  States 
the  principle  of  private  ownership  ^\dth  stricter  govern- 
mental regulation  has  been  definitely  laid  dowm ;  the  prob- 
lem of  the  future  is  simply  how  far  that  control  shall  go. 

Other  Transportation  Agencies 

The  discussion  of  our  steam  railroads  does  not  exhaust 
the  subject  of  transportation.  A  recent  and  important 
development  is  the  growth  of  electric  interurban  rail- 
ways, which  are  opening  up  districts  untouched  by  the 
more  expensive  steam  roads  and  exercising  a  marked  in- 
fluence in  rural  districts  upon  business  and  social  life. 

A  more  significant  problem,  both  because  of  its  close 
relations  to  the  railroads  and  its  monopoly  character,  is 
offered  by  the  express  companies.  Organized  at  a  time 
when  railroads  were  new  and  undeveloped,  they  took 
over  the  safe  and  expeditious  delivery  of  small  and  val- 
uable articles.    They  have  since  grown  in  importance  and 


192  Business  Economics 

power;  three  large  companies  now  control  most  of  the 
business.  Since  they  are  generally  in  the  form  of  part- 
nerships and  not  of  corporations  it  has  not  been  possible 
to  bring  them  under  legal  control,  and  their  rates  are  ex- 
tremely high — three  or  four  times  as  much  as  freight 
rates.  In  some  cases  the  railroads,  in  order  to  gain  the 
profits  from  these  high  rates,  have  organized  express 
companies  to  operate  over  their  lines.  Even  where  that 
is  not  done,  the  express  companies  are  performing  a 
service  which  could  as  well  be  performed  by  the  rail- 
roads themselves  and  at  lower  rates. 

These  facts,  as  well  as  the  successful  examples  of  par- 
cel post  systems  in  England  and  Europe,  finally  led  the 
government  to  establish  a  parcel  post  system  in  this 
country  in  1911.  From  the  very  beginning  it  proved  a 
success,  and  the  scope  of  its  usefulness  has  gradually  in- 
creased. The  parcel  post  system  at  once  necessitated  the 
adjustment  and  lowering  of  express  rates  and  caused  the 
express  business  of  the  country  to  fall  off  appreciably. 

Telephone  and  Telegraph 

The  importance  of  the  telephone  and  telegraph  in  our 
modern  industrial  life  cannot  be  overestimated.  As 
means  of  transmitting  intelligence  they  have  served  to 
bring  the  most  distant  parts  of  the  world  into  almost  in- 
stant touch  and  have  made  possible  the  modern  centrali- 
zation of  business.  Both  offer  the  same  problems  of 
monopoly  that  we  have  seen  exist  in  other  parts  of  this 
field,  the  telegraph  business  being  completely  monopo- 
lized by  two  large  companies,  the  telephone  business  by 
one,  all  strongly  entrenched  behind  patents.  The  de- 
sirability of  public  ownership  of  these  utilities  rests 
upon  stronger  grounds  than  in  the  case  of  railroads  and 
is  strongly  urged  by  many  conservative  writers. 


Transportation  193 

Water  Transportation 

Although  attention  has  usually  been  centered  upon  the 
railroads  in  any  discussion  of  the  transportation  ques- 
tion in  the  United  States,  there  are  important  practical 
problems  connected  with  both  the  inland  and  the  ocean 
water  transportation.  The  questions  of  constructing  ar- 
tificial inland  waterways  and  of  subsidizing  our  foreign 
merchant  marine  are  vital  political  and  industrial  issues. 
The  United  States  is  probably  better  provided  with  in- 
ternal navigable  natural  waterways  than  any  other  coun- 
try. Its  navigable  rivers  comprise  some  18,000  miles,  af- 
fording access  to  the  very  heart  of  the  continent  both 
from  the  Atlantic  coast  and  from  the  Gulf,  They  form 
a  cheap  and  convenient  means  of  transportation,  espe- 
cially for  bulky  and  cheap  articles ;  30,000,000  tons  a  year 
are  carried  on  the  streams  of  the  Mississippi  Valley 
alone,  though  much  of  the  former  traffic  has  been  di- 
verted to  the  railroads.  On  the  northern  border  of  the 
country  the  Great  Lakes  form  an  unrivaled  series  of  in- 
land seas.  The  traffic  on  these  lakes  shows  a  great  in- 
crease every  year,  amounting  now  to  over  60,000,000 
tons  annually.  The  federal  government  has  performed 
useful  service  in  improving  the  conditions  of  navigation 
along  these  natural  waterways,  and  it  is  now  considering 
a  comprehensive  scheme  for  their  further  improvement. 

Canals 

A  very  different  problem  is  offered  by  our  canal  sys- 
tem. During  the  period  1820-1840  many  canals  were  con- 
structed by  the  states  to  connect  existing  waterways  and 
to  provide  an  outlet  for  produce  from  the  interior.  The 
best  examples  of  these  were  the  Erie  and  the  Ohio  canals. 
After  the  development  of  the  railway,  however,  traffic  be- 


194  Business  Economics 

gan  to  be  steadily  and  then  rapidly  diverted  from  the 
canals  to  these  quicker  avenues  of  transportation.  Many 
of  the  canals  were  bought  up  by  their  rivals  and  per- 
mitted to  fall  into  disuse,  while  those  retained  by  the 
state  governments  remained  mere  shallow  ditches,  unim- 
proved and  ill-adapted  to  modern  needs.  The  construc- 
tion of  the  Panama  Canal  by  the  federal  government  and 
the  recent  expenditure  bj^  the  people  of  New  York  State 
of  over  $100,000,000  for  the  improvement  of  the  Erie 
Canal  have  brought  the  question  of  the  rehabilitation  of 
our  neglected  canal  system  to  the  front  again.  It  seems 
wasteful  not  to  connect  the  separate  links  in  the  mag- 
nificent system  of  natural  waterways  already  provided 
by  nature,  and  this  will  probably  be  the  next  step  taken. 
And  indeed  a  beginning  has  already  been  made  by  the 
construction  of  the  Hennepin  Canal,  the  Des  Plaines 
Canal,  and  the  Cape  Cod  Canal. 

It  must  however  be  borne  in  mind  that  there  are  two 
distinct  types  of  canal:  (1)  those  which  are  simply  short 
connecting  links  between  navigable  waterways  and  which 
permit  the  passage  of  vessels  used  on  those  waters;  and 
(2)  those  canals  which  are  shallow,  have  extensive  lock- 
age, and  permit  the  use  of  only  small  boats,  thus  neces- 
sitating the  transshipment  of  freight.  One  might  well 
advocate  the  construction  and  enlargement  of  the  first 
type,  and  yet  hesitate  to  approve  of  the  second.  As  yet, 
however,  owing  in  part  to  the  opposition  and  clamor  of 
railroad  interests,  the  question  of  canals  has  not  received 
the  attention  it  deserves  in  the  United  States. 

The  American  Merchant  Marine 

The  ocean  merchant  marine  comprises  two  widely  dif- 
ferent branches,  the  coastwise  and  the  foreign  trade. 
The  former  is  open  only  to  vessels  flying  the  American 


Transportation  195 

flag,  and  has  shown  a  very  steady  growth ;  five-sixths  of 
our  ocean  merchant  marine  today  is  engaged  in  this 
branch  of  commerce.  Coal,  himber,  cotton,  and  similar 
bulky  commodities  constitute  the  chief  items  entering 
into  the  coastwise  trade.  The  tonnage  of  American  ves- 
sels engaged  in  the  foreign  trade,  on  the  other  hand,  has 
shoAvn  a  steady  decline  ever  since  the  outbreak  of  the 
Civil  War.  Foreign  vessels  today  carry  fully  90  per  cent 
of  the  foreign  commerce  of  the  United  States.  The 
causes  of  this  decline  are  economic  rather  than  political, 
for  American  legislation  has  on  the  whole  been  very  lib- 
eral to  the  shipping  interests. 

At  the  time  the  western  part  of  our  country  began  to 
be  opened  up  and  its  great  resources  exploited,  our  mer- 
chant marine  was  one  of  the  best  in  the  world.  But  now 
the  other  opportunities  for  the  investment  of  capital  were 
so  profitable  and  alluring,  and  the  need  of  it  so  great, 
that  all  the  available  labor  and  capital  of  the  American 
people  began  to  be  devoted  to  the  development  of  their 
internal  resources.  A  nation  cannot  do  everything  with 
equal  advantage  at  the  same  time  au}^  more  than  an  indi- 
vidual can.  Accordingly  we  began  to  withdraw  our  cap- 
ital from  shipping  and  to  devote  it  to  agriculture,  min- 
ing, manufacturing,  transportation,  and  similar  more 
profitable  enterprises.  Foreigners  could  build  vessels 
and  run  them  more  cheaply  than  we  could  and  it  paid  us 
to  hire  them  to  do  it.  Lately,  however,  and  especially 
since  the  recent  awakening  of  a  national  consciousness 
after  the  Spanish-American  War,  the  patriotism  of  many 
individuals  has  been  hurt  by  the  thought  that  we  had  to 
depend  upon  foreign  vessels  for  the  carriage  of  our  for- 
eign commerce,  while  in  the  minds  of  others  a  compre- 
hensive naval  program  demanded  the  building  up  of  a 
native  merchant  marine. 


196  Business  Economics 

Two  questions  suggest  themselves  here :  Do  we  wish  to 
stimulate  this  growth  artificially?  And,  if  we  do,  what 
means  shall  we  adopt?  On  the  second  point  the  Mer- 
chant Marine  Commission  of  1904  recommended  for  the 
United  States  a  general  bounty  on  all  shipping,  such  as 
France  has,  and  the  subvention  of  certain  lines  of  steam- 
ers over  ten  specified  routes,  following  the  example  of 
Great  Britain,  Germany,  and  Japan.  Without  commit- 
ting ourselves  on  this  point,  it  ma}'  be  suggested  that  on 
political,  geographical,  and  economic  grounds  we  may 
expect  in  the  near  future  to  see  the  natural  development 
of  an  American  merchant  marine.  The  recent  removal 
of  registry  restrictions  may  be  expected  to  encourage  its 
up-building. 

With  the  growth  of  our  foreign  trade,  the  accumulation 
of  capital  at  home,  and  the  building  up  of  a  strong  navy, 
the  conditions  for  American  shipbuilding  and  shipping 
will  become  steadily  more  favorable,  and  we  may  expect 
to  see  American  enterprise  engage  in  this  as  in  other 
lines  of  industry.  Eventually  we  are  destined  to  become 
a  maritime  nation. 

TEST  QUESTIONS 

1.  Explain  why  transportation  service  is  of  a  monopolistic 
character. 

2.  To  what  extent  has  railroad  consolidation  progressed  in 
this  country  ?    What  are  the  main  systems  ? 

3.  What  are  the  three  chief  kinds  of  discrimination? 

4.  What  are  the  main  problems  involved  in  the  regulation  of 
transportation  companies? 

5.  What  developments  and  changes  have  taken  place  in  the 
express  business  during  the  past  few  years? 

6.  What  can  you  say  concerning  the  possibilities  of  internal 
waterways  for  the  United  States? 


Transportation  197 

7.  Show  why  the  causes  for  the  decline  in  tonnage  of  Amer- 
ican vessels  are  economic  rather  than  political. 

8.  What  recent  changes  in  the  shipping  policy  of  the  United 
States  Government  are  tending  to  build  up  a  merchant  marine  ? 

9.  What  has  been  the  history  of  express  companies  in  the  de- 
velopment of  American  transportation? 

10.  What  effect  has  the  parcel-post  system  had  upon  the  dis- 
tribution of  goods  from  place  to  place? 

11.  What  two  distinct  types  of  canals  are  to  be  distinguished? 

12.  Summarize  the  chief  transportation  problems  confronting 
the  people  of  the  United  States. 


CHAPTER  XV 
problems  of  distribution 

Natuke  of  the  Peoblem 

So  far  we  have  discussed  for  the  most  part  those  eco- 
nomic problems  that  center  round  the  production  of 
wealth,  such  as  the  use  of  natural  resources,  large-scale 
production,  trusts  and  monopolies,  labor  organizations, 
unemployment,  industrial  education,  and  co-operation. 
Now  we  shall  consider  briefly  a  few  of  the  problems  which 
are  connected  with  the  distribution  of  wealth. 

Professor  Blackmar  ^  says  that  the  three  great  prob- 
lems of  economic  society  are:  *' First,  how  to  create  the 
largest  amount  of  utilities  or  wealth ;  second,  how  justly 
to  divide  this  amount;  and  third,  how  to  make  the  prod- 
uct minister  to  the  permanent  rather  than  to  the  tran- 
sient well-being  of  society."  The  first  problem  we  have 
already  discussed;  the  second  forms  the  subject  of  the 
present  chapter;  and  the  third  will  be  taken  up  in  the 
next  chapter. 

Within  the  last  century  the  center  of  interest  in  the 
practical  application  of  economic  principles  has  decidedly 
shifted  from  production  to  distribution.  The  earlier 
w^riters  on  economics,  as  evidenced  by  the  mercantilists 
of  the  seventeenth  and  eighteenth  centuries,  even  Adam 
Smith,  were  chiefly  interested  in  methods  of  increasing 

1  Economics,  p.  133. 

198 


Distribution  199 

a  nation's  wealth.  With  the  introduction  of  the  factory 
system  and  the  opening  up  of  vast  natural  resources  by 
improvements  in  mining  and  transportation,  the  produc- 
tion of  wealth  has  enormously  increased,  and  now  the 
question  of  the  method  of  its  distribution  or  division  is 
felt  to  be  more  pressing. 

Kinds  of  Distribution 

Under  the  term  ' '  distribution ' '  two  different  processes 
are  included,  which  should  be  distinguished  before  going 
further.  The  first  is  called  'Afunctional  distribution" 
and  concerns  the  distribution  of  the  jjroduct  of  industry 
or  the  income  of  society  among  the  different  factors  of 
production.  That  is  to  say,  land,  labor,  capital,  and  man- 
agerial ability  have  contributed  in  varying  degrees  to  the 
production  of  a  certain  amount  of  current  wealth,  and 
the  problem  of  functional  distribution  is  to  ascertain  how 
the  net  product  resulting  from  these  joint  efforts  is  di- 
vided— (1)  how  much  goes  to  rent,  (2)  how  much  to 
wages,  (3)  how  much  to  interest,  and  (4)  how  much  to 
profits. 

The  second  kind  of  distribution  is  the  division  of  the 
wealth  of  society  among  individuals  or  families;  this  is 
personal  distribution  and  raises  the  question  of  poverty 
and  great  wealth.  In  discussing  these  problems,  how- 
ever, we  must  remember  that  wealth  production  and  dis- 
tribution take  place  in  modern  society  under  conditions 
imposed  by  the  social  order  in  which  we  live ;  these  were 
defined  as  competition,  private  property,  and  personal 
liberty.  If  any  modifications  of  the  processes  of  distri- 
bution were  desired,  it  would  undoubtedly  be  necessary 
to  alter  these  fundamental  institutions. 


200  Business  Economics 

Importance  of  Distribution 

John  Stuart  Mill  held  that  production  was  governed 
by  natural  laws,  which  could  be  ascertained  and  stated, 
but  that  distribution  was  artificial  and  hence  that  it  was 
not  possible  to  discover  constant  and  certain  laws  gov- 
erning it.  Beginning  mainly  with  Mill,  the  ethical  ques- 
tion has  been  more  and  more  asked  as  to  what  share  each 
factor  in  production  ought  to  get,  not  merely  what  it  does 
receive. 

Hence  the  question  is  rising  more  and  more  as  to  what  should 
be  the  basis  of  division,  and  many  proposals  have  been  made. 
It  is  proposed  that  laborers  combine  to  get  a  larger  share. 
Hence  we  have  trade  unions,  Knights  of  Labor,  etc.  It  is  pro- 
posed that  capitalists  and  landlords  give  a  larger  proportion  of 
the  produce  to  the  laborers  than  they  are  able  to  secure  by  mere 
private  struggle.  Hence  we  have  proposals  for  profit-sharing 
and  various  charities.  It  is  proposed  that  laborers  combine  to 
be  their  own  capitalists  and  landlords;  hence  we  have  all  sorts 
of  co-operative  and  communistic  experiments.  It  is  asserted 
that  the  wealthy  classes  have  so  much  power  in  their  hands 
that  private  co-operation  cannot  succeed  in  competing  against 
them,  and  hence  it  is  proposed  that  all  the  people,  through 
government  (municipal,  state,  and  national)  secure  all  the 
means  of  production  (capital  and  land,  so  far  at  least  as  land  is 
used  for  production),  and  operate  them  collectively  for  the 
equitable  good  of  all,  the  people  thus  being  their  own  employers, 
capitalists,  and  landlords;  Hence  we  have  municipalism,  nation- 
alism, socialism.  It  is  claimed  that  capitalists  and  landlords 
have  been  able  to  secure,  and  are  today  able  to  maintain,  their 
large  share  in  distribution,  only  through  the  favoritism  of  the 
Government.  Hence  we  have  proposals  for  free  trade,  the  single 
tax,  *  *  *  the  extreme  proposals  of  the  very  great  mini- 
mizing of  the  state  in  individualism,  or  the  abolition  of  the 
Government  in  anarchism. ^ 

2  Bliss,  Encyclopedia  of  Social  Reform,  article  ' '  Distribution, ' '  p.  501. 


Distribution  201 

In  view  of  this  very  imperfect  list  it  is  not  too  much 
to  say  that  most  of  the  economic  problems  that  are  stir- 
ring society  today  are  connected  with  the  distribution  of 
wealth. 

Bases  for  Distribution 

The  first  question  that  suggests  itself  in  the  discussion 
of  functional  distribution  is  as  to  whether  it  is  actually 
governed  by  so-called  natural  law.  It  is  observable  that 
the  amounts  which  go  to  rent,  wages,  interest,  and  profits 
are  regularly  quite  constant.  What  determines  this? 
The  socialists  contend  that  "natural  distribution"  is  the 
only  just  method  and  insist  that  the  state  should  regu- 
late this  just  distribution ;  they  are  not  clear,  however,  as 
to  what  this  natural  method  is.  Henry  George  uses  the 
same  phrase  when  he  says:  "The  just  distribution  of 
wealth  is  manifestly  a  natural  distribution  of  wealth,  and 
this  is  that  which  gives  to  him  who  makes  it  and  secures 
to  him  who  saves  it." 

All  such  statements  beg  the  question,  for  they  all  turn 
on  the  use  of  the  word  "natural."  Many  modern  econ- 
omists are  inclined  to  assert  that  the  question  of  dis- 
tribution is  not  an  ethical  one,  not  a  question  of  what 
ought  to  be  but  of  what  is.  Thus  Professor  Fetter  says :  ^ 
"Distribution  in  economics  is  the  reasoned  explanation 
of  the  way  in  which  the  total  product  of  a  society  is  di- 
vided among  its  members.  It  is  a  logical  question  and 
not  an  ethical  one."  And  Professor  Clark  writes: 
"There  is,  in  short,  a  deep-acting  natural  law  at  work 
amid  the  confusing  struggles  of  the  labor  market."  It 
will  not  be  possible,  in  the  brief  limits  of  this  chapter, 
to  take  up  all  the  theories  as  to  the  way  in  which  this  dis- 
tribution is  effected  among  the  claimants  to  a  share  of 

3  Economics,  p.  360. 


202  Business  Economics 

the  product,  but  a  few  of  the  more  important  practical 
results  may  be  stated.  We  shall  take  up  the  four  differ- 
ent factors  in  turn. 

Rent 

The  word  ' '  rent ' '  is  used  with  two  very  different  mean- 
ings. In  the  economic  sense,  the  word  ''rent"  refers  to 
the  return  for  the  use  of  some  natural  objects  and  agen- 
cies, especially  land.  In  the  popular  sense,  the  word 
''rent"  is  used  to  designate  the  amount  paid  to  an  owner 
for  the  use  of  land,  houses,  stores,  boats,  or  anything 
else.  The  distinction  will  become  clearer  by  illustration. 
In  many  of  our  cities  the  ground  and  building  values  are 
stated  separately  in  the  valuations  that  are  made  for  the 
purposes  of  taxation.  Many  buildings  are  constructed 
upon  land  that  is  rented  for  long  terms.  What  has  given 
land  alone  this  value!  Evidently  in  all  of  these  cases 
the  person  who  pays  rent,  in  the  common  use  of  the 
term,  for  a  house  or  an  office,  pays  for  two  factors,  a 
ground  value  and  a  building  value. 

If  land  were  unlimited  in  quantity  and  of  equal  value 
for  use  every^vhere,  no  such  thing  as  economic  rent  could 
exist.  A  person  would  simply  refuse  to  pay  land  rent 
and  would  get  on  a  piece  of  free  land  to  carry  on  his  busi- 
ness or  build  his  house.  Land,  however,  is  limited  in 
quantity,  and  most  of  the  free  land  has  been  taken  up. 
This  fact  accounts  for  the  constantly  increasing  value  of 
land,  as  a  result  of  which  Henry  George  argued  that  most 
of  the  future  income  of  society  will  be  absorbed  by  the 
landlords. 

Land  can  be  put  to  various  uses,  but  some  land  is  more 
useful  or  is  more  favorably  located  for  some  purposes 
than  other  land.  Therefore  some  land  is  more  valuable 
than  other  land.    It  is  evident  that  good  wheat-growing 


Distribution  203 

land  yields  more  per  acre  for  a  given  application  of  labor 
than  poor  land  does.  If  sufficient  of  the  good  land  could 
be  secured  to  grow  all  the  wheat  that  is  needed  for  con- 
sumption, none  of  the  poorer  lands  would  be  used.  But 
good  wheat  land  is  scarce  and  therefore  the  wheat- 
grower  will  cultivate  poorer  and  poorer  grades  of  land 
as  the  demand  for  wheat  grows,  until  a  certain  point  is 
reached  at  which  the  land  will  be  valueless  for  wheat- 
growing;  that  is,  it  would  cost  more  to  grow  wheat  on 
the  poorest  or  marginal  land  at  the  existing  prices  and 
demands  for  wheat  than  the  land  would  return. 

It  is  the  advantage  which  the  better  land  enjoys  over 
this  marginal  land  that  gives  the  former  value,  and  the 
more  advantages  it  possesses,  the  more  valuable  it 
becomes.  This  advantage  gives  rise  to  rent.  The  holder 
of  the  better  land  can  capitalize  the  excess  value  of  his 
land  over  the  marginal  land  for  whatever  purposes  land 
is  used,  whether  it  be  a  building  site  on  Broadway  or 
wheat  lands  in  the  Red  River  Valley.  Economic  rent 
appears  as  a  competitive  premium  paid  for  fertility  or 
location.  It  is  an  excess  over  and  above  the  total  ex- 
penses of  the  more  fortunate  producers.  It  forms  no 
part  of  the  expenses  of  production  and  does  not  deter- 
mine prices;  in  fact  economic  rent  is  a  result  of  prices. 
It  is  due  to  the  comparatively  high  price  which  must  be 
paid  to  bring  out  the  total  and  necessary  product  through 
the  resort  to  poorer  lands. 

Such  is  the  nature  of  economic  rent  as  one  of  tlie  fac- 
tors which  shares  in  distribution.  It  is  evident  that  the 
owners  of  land  are  the  beneficiaries  in  all  social  and  in- 
dustrial progress  that  is  made.  The  practical  problem 
that  suggests  itself  is:  Do  we  want  private  property  in 
land?  The  socialists  answer  "No,"  but  the  individual- 
ists insist  that  the  best  use  has  been  and  can  be  made  of 


204  Business  Economics 

land  only  by  reducing  it  to  private  ownership.  Between 
these  two  extremes  there  seems  to  be  a  tendency  to  de- 
mand for  society  a  part  of  these  social  gains  by  means 
of  various  single  tax  schemes  and  taxes  on  the  unearned 
increment  of  land.  The  whole  problem  of  land  taxation 
is  involved  in  this  question  of  rent. 

Interest 

All  through  Biblical  history,  Grecian  history,  Roman 
history,  and  the  Middle  Ages,  interest  was  a  favorite  ob- 
ject of  attack  by  statesmen  and  church  leaders.  Money- 
lending  was  looked  upon  as  a  disgraceful  occupation  and 
interest  as  usury,  and  therefore  wrong.  This  early  at- 
titude of  society  toward  interest  was  perhaps  justifiable, 
because  money  then  was  borrowed  chiefly  to  pay  living 
expenses.  In  this  sense  it  was  regarded,  perhaps  rightly, 
as  a  sign  of  incompetency.  There  were  in  those  days 
practically  no  opportunities  for  the  use  of  money  as  pro- 
ductive capital.  There  is  a  vital  distinction  between  bor- 
rowing for  a  productive  purpose  and  borrowing  to  pay 
living  expenses.  The  latter  is  undoubtedly  bad  practice 
and  cannot  be  justified  except  in  extreme  cases.  But  to 
borrow  for  a  genuinely  productive  purpose,  for  a  pur- 
pose which  will  bring  in  more  than  enough  to  pay  off  the 
principal  and  interest,  shows  business  sagacity. 

Interest  is  the  price  paid  for  the  use  of  capital.  The 
interest  appears  as  the  result  of  an  act  of  exchange.  The 
question  may  fairly  be  asked:  What  is  the  equivalent? 
Why  is  $1  now  worth  $1.06  a  year  hence?  A  great  many 
theories  have  been  advanced  to  explain  the  facts,  but  they 
all  seem  to  come  to  the  conclusion  that  present  goods 
are  worth  more  than  future  goods.  The  lapse  of  time 
from  the  date  at  wiiich  a  loan  is  made  until  it  is  paid 
creates  a  difference  in  value.    The  holder  of  a  dollar  has 


Distribution  205 

his  choice.  He  may  spend  it  now  or  he  maj^  save  it  for 
future  use.  The  present  value  of  a  dollar  is  worth  so 
much  more  to  him  that  if  he  is  to  defer  using  it  for  one 
year  he  will  want  not  $1,  but  $1.06  at  that  time.  Thus 
interest  is  primarily  a  time  value. 

These  time-value  theories  explain  why  lenders  demand 
interest,  but  do  not  make  clear  the  reason  why  borrowers 
can  afford  to  pay  interest.  They  can  do  this  because  the 
capital  they  borrow  is  used  for  productive  purposes,  and 
with  it  they  produce  during  the  year  not  merely  the 
equivalent  of  the  interest  paid  but  enough  more  to  afford 
a  profit  to  the  borrower  and  to  replace  the  capital  fund 
when  it  is  used  up.  Capital  is  usually  spoken  of  as  so 
much  money,  and  is  borrowed  of  a  bank  in  the  form  of 
money  or  a  credit  deposit,  but  in  actual  business  pro- 
ductive capital  is  embodied  in  the  form  of  buildings, 
machinery,  agricultural  implements,  mercantile  stocks, 
railways,  etc.  By  the  help  of  these  a  man  can  produce 
much  more  than  without  their  use,  so  that  he  can  afford 
to  pay  interest  for  them  or  for  the  money  that  gives  him 
command  over  them.  According  to  this  producti\'ity 
theory,  interest  is  thus  credited  to  capital  as  its  reward 
in  the  functional  distribution  of  wealth. 

Socialists  are  attacking  interest  because  it  is  the  out- 
come of  private  property.  Their  claim  is  that  it  is  based 
upon  inequality  and  perpetuates  inequality.  Part  of  this 
contention  is  granted  by  most  of  the  modern  individual- 
ists of  today.  They  believe  with  John  Stuart  Mill  that 
private  property  should  exist  because  it  is  the  most  ex- 
pedient method  yet  devised  for  encouraging  thrift,  but 
that  the  institution  of  inheritance  should  be  changed.  In 
response  to  this  feeling,  the  inheritance  taxes  are  being 
used  to  break  up  large  fortunes.  In  this  way  society 
periodically  shares  in  these  gains  of  individuals  and  pre- 


206  Business  Economics 

vents  the  perpetuation  of  the  social  and  economic  in- 
equalities which  capital  and  interest  tend  to  create. 

Peofits 

Profits  are  the  reward  which  the  manager  of  a  business 
receives  for  his  services  in  organizing  and  superintend- 
ing the  business.  This  share  of  the  social  income  was  the 
last  to  be  recognized  by  economists,  and  its  rightfulness 
is  even  yet  denied  by  the  socialists.  They  insist  that 
profits  are  really  the  earnings  of  labor  which  have  been 
withheld  from  the  laborer  by  the  superior  skill  and  eco- 
nomic strength  of  the  capitalist  manager ;  they  are  insti- 
tutional robbery,  the  exploitation  of  labor.  It  is  not 
possible  to  take  up  the  arguments  on  this  point,  but  it 
may  be  said  in  a  word  that  the  manager  of  business  con- 
tributes a  needed  service  to  the  work  of  society  just  as 
truly  as  the  laborer  does,  and  receives  his  earned  reward 
in  the  form  of  profits. 

The  analogy  of  profits  to  rent  made  by  Professor  Fran- 
cis A.  Walker  is  valuable  for  some  purposes.  He  be- 
lieved that  profits  are  the  result  of  exceptional  ability 
or  exceptional  opportunity,  just  as  rent  is  due  to  fertility 
of  the  soil  or  location  of  the  land.  There  could  be  no 
profits  if  all  men  were  equally  able  and  if  enough  work 
could  be  found  for  all.  In  all  industries  there  is  a  no- 
profits  class  of  employers.  The  price  of  production  is 
apt  to  be  determined  by  the  portion  of  the  supply  which 
is  produced  at  the  greatest  disadvantage;  that  is,  the 
cost  of  steel  will  probably  be  determined  by  the  cost  of 
production  in  the  least  economically  managed  plant  that 
can  continue  to  operate  to  supply  the  demand.  Such  a 
plant  makes  no  profits,  but  only  expenses.  All  plants 
that  manufacture  more  economically  than  this  marginal 


Distribution  207 

plant  make  a  profit,  and  thus  they  gain  an  increasing  ad- 
vantage over  the  less  fortunate  producers. 

If  this  conception  of  profits  is  taken,  then  profits  can- 
not in  any  sense  come  out  of  wages.  Wages  could  not  be 
higher  in  those  plants  operating  on  a  margin,  or  they 
would  be  forced  out  of  business  by  the  increased  cost  of 
production.  Since  these  least  efiicient  plants  set  the 
standards  of  wages  for  the  entire  industry,  it  can  hardly 
be  claimed  that  profits  are  taken  out  of  wages.  Profits 
are  an  inevitable  element  in  private  ownership  produc- 
tion, just  as  rent  follows  inevitably  from  private  owner- 
ship of  land.  Perhaps  society  as  a  whole  has  the  same 
sort  of  claim  upon  profits  as  upon  rent.  This  would 
seem  to  be  one  of  the  theories  upon  which  a  graduated 
income  tax  could  be  justified.  Such  a  tax  is  similar  to 
the  tax  on  the  unearned  increment  of  land. 

Wages 

Wages  are  the  reward  of  labor.  It  is  often  assumed 
that  wages  are  lower  than  they  should  be,  that  the  la- 
borer in  some  way  is  deprived  of  a  portion  of  what  he  has 
rightfully  earned.  It  is  worth  while  to  inquire  briefly  into 
how  the  share  of  labor  in  the  distribution  of  the  social 
income  is  determined.  Various  theories  have  been  de- 
veloped to  explain  the  distributive  process,  of  which  we 
may  notice  three. 

IRON    LAW    OF    WAGES    THEORY 

The  oldest  in  point  of  time  and  the  most  pessimistic 
theory  held  that  wages  were  fixed  by  competition  and 
the  growth  of  population  at  the  bare  subsistence  mini- 
mum, a  bare  starvation  level.  If  by  some  happy  chance 
wages  were  raised  above  this  point,  then  the  population 
would  speedily  multiply  and  the  increased  competition 


208  ,  Business  Economics 

thus  brought  about  among  the  laborers  would  depress 
wages  again  to  the  lowest  amount  sufficient  to  support  a 
family.  This  theory  of  population  is  known  as  the  Mal- 
thusian  theory,  named  after  its  formulator.  Under  the 
name  of  the  '  *  iron  law  of  wages, ' '  this  theory  is  still  put 
forth  by  the  socialists,  together  wdth  the  institution  of 
private  property,  as  the  explanation  of  wages. 

THE  PKODUCTIVITY  THEORY 

Historically,  however,  the  Malthusian  theory  has  been 
proved  untrue,  as  the  advance  in  the  standard  of  living 
among  the  working  class  during  the  past  century  testi- 
fies. It  has  now  been  almost  w^holly  superseded  by  the 
so-called  ' '  productivity  theory, ' '  ^  which  asserts  that 
wages  depend  upon  the  productivity  of  labor;  that  the 
laborer  gets  what  he  produces ;  and  that  this  share  is  as- 
sured him  by  the  working  out  of  the  competitive  process 
under  free  competition.  If  this  theory/  is  true,  there  can 
be  no  ethical  question  raised ;  if  labor  is  dissatisfied  with 
its  share,  then  it  must  increase  its  productive  efficiency. 
As  a  matter  of  fact  w^ages  have  always  been  high  in  the 
United  States  because  labor  has  been  relatively  scarce 
compared  with  land  and  capital,  and  consequently  its 
marginal  productivity  has  been  high. 

THE  BARGAIN  THEORY 

The  third  theory  says  that  wages  are  a  result  of  bar- 
gaining, of  competition  in  the  labor  market,  a  question 
of  supply  and  demand.  Under  these  circumstances  it  is 
largely  a  question  of  economic  strength  between  labor 
and  capital,  and  if  labor  is  well-organized,  alert,  and  able 
to  drive  a  good  bargain,  then  wages  will  be  high;  other- 

4  More  truly,  the  marginal  productivity  theory. 


Distribution  209 

wise  they  will  be  low.  While  there  is  an  element  of  truth 
in  the  last  theory,  the  second  one  seems  the  truest  expla- 
nation of  general  wages;  certain  it  is  that  no  monopoly 
power  of  labor,  however  great,  could  permanently  main- 
tain wages  at  a  level  higher  than  the  actual  produce  of 
labor.  The  element  of  truth  in  the  first  theory  is  that 
wages  can  never,  for  any  length  of  time,  fall  below  the 
cost  of  living. 

Inequality  in  Earning  Power 

The  economist  is  interested  in  the  problem  of  functional 
distribution,  but  to  the  individual  worker  that  of  his  own 
share  in  the  social  income  is  of  greater  importance.  Why 
is  it  that  some  men  receive  so  much  more  than  other  men? 
What  are  the  causes  that  make  for  differences  in  earning 
power  of  different  individuals?  In  answering  this  ques- 
tion we  may  first  distinguish  between  racial  and  individ- 
ual characteristics. 

Differences  in  productive  efficiency  due  apparentlj^  to 
racial  and  national  variations  have  often  been  noted. 
For  instance,  Americans  have  been  particularly  efficient 
in  the  invention  of  labor-saving  devices  and  the  use  of 
complicated  machinery;  the  Germans  in  lines  of  work 
requiring  patient,  untiring  industry;  tlie  French  in 
branches  where  artistic  design  was  of  importance;  and 
the  Japanese  in  whatever  called  for  deftness  of  touch. 
These  peculiarities  are  not  fixed  or  permanent,  however, 
and  the  tendency  is  for  these  national  differences  to  dis- 
appear with  migration  of  labor  and  the  development  of 
technical  training. 

The  differences  between  individuals  of  the  same  race 
or  nation  pre  even  more  marked  than  those  between  dif- 
ferent nationalities.    These  are  partly  inborn  and  partly 


210  Business  Economics 

the  result  of  training.    We  may  classify  the  factors  that 
make  for  variation  as  follows: 

(1)  Objective  physical  conditions,  such  as  plentiful 
national  resources,  improved  machinery  and  capital  to 
work  with,  and  good  and  sufficient  food,  clothing,  and 
shelter  to  maintain  efficiency  at  a  high  level ;  if  the  worker 
is  well  equipped  in  all  these  ways,  he  will  be  able  to  pro- 
duce more  than  another  man  who  is  less  well  provided 
for.  This  is  one  of  the  explanations  of  high  wages  in  the 
United  States. 

(2)  A  favorable  political  and  social  environment,  which 
affords  security  of  life  and  property,  freedom  from  the 
burdens  of  militarism,  honesty  and  commercial  morality, 
social  ideals  which  hold  labor  in  respect  and  call  forth 
the  best  efforts  in  each  man — all  of  these  favor  the 
development  of  efficiency  in  the  case  of  the  worker,  and 
the  absence  of  any  one  of  them  handicaps  him  decidedly. 
In  this  group  may  also  be  included  the  organization  and 
division  of  labor;  where  these  are  highly  and  skilfully 
developed  by  able  managers  the  productive  capacity  of  the 
individual  worker  may  be  greatly  increased. 

(3)  Many  of  these  factors  lie  apparently  beyond  the 
control  of  the  individual,  but  we  now  come  to  a  group 
which  the  individual  worker  may  influence.  His  bodily 
strength  and  vigor  may  be  increased  and  maintained  by 
right  living,  the  avoidance  of  dissipation  and  vicious 
habits,  and  the  proper  observance  of  the  laws  of  health. 
But  even  more  important  in  our  modern  industrial  society 
with  its  constant  demands  upon  the  intellectual  capacity 
of  the  worker,  is  education,  and  in  this  connection  espe- 
cially technical  education.  Every  child  starts  life  equally 
incapable  and  ignorant;  the  extent  of  the  progress  that 
he  makes  toward  the  goal  of  success  will  depend  almost 
entirely  upon  the  degree  to  which  his  faculties  are  trained 


Distribution  211 

and  sharpened.    The  importance  of  education  of  the  right 
sort  can  scarcely  be  overestimated. 

Distribution  of  Fortunes 

Of  practical  and  growing  interest  in  this  connection 
are  such  problems  as  the  increase  of  large  fortunes,  the 
causes  of  poverty,  and  similar  questions.  The  boast  of 
our  Republic  has  long  been  that  here  opportunity  was 
open  to  all,  that  wealth  was  widely  diffused,  and  that  such 
inequalities  of  fortune  as  characterized  the  nations  of  the 
Old  World  were  happily  lacking.  In  the  fifty-five  years, 
1850-1904,  the  per  capita  value  of  all  property  in  the 
United  States  exactly  quadrupled;  how  has  this  increase 
been  distributed?  Unfortunately  we  have  no  complete 
statistics  on  this  point,  yet  reliable  estimates  by  authorita- 
tive writers  all  tell  the  same  story — of  great  concentra- 
tion of  wealth  in  the  possession  of  a  comparatively  few 
rich  families.  In  1893  Mr.  George  K.  Holmes  concluded 
from  a  study  of  the  statistics  of  farm  and  home  owner- 
ship in  the  United  States  that  ''91  per  cent  of  the  families 
of  the  country  own  no  more  than  about  29  per  cent  of  the 
wealth,  and  9  per  cent  of  the  families  own  about  71  per 
cent  of  the  wealth."  A  more  accurate  and  satisfactory 
statement  can  be  drawn  from  the  income-tax  returns  for 
Prussia,  which  tells  almost  the  same  story  with  regard 
to  income.  The  following  table  is  condensed  from  an  ar- 
ticle by  Professor  A.  Wagner. 

Distribution  op  Income  in  Prussia,  1902 


Income 

Per  Cent 
OF  Persons 

Per  Cent 
OF  Income 

Below  $214    

70.7 

25.8 

3.5 

33  0 

$214  to  $714   

34  9 

Over  $714  

3'^  1 

212  Business  Economics 

According  to  these  figures  over  two-thirds  of  the  per- 
sons— heads  of  families  or  single  adults — had  only  one- 
third  of  the  income,  while  31/2  per  cent  had  another  third. 
Another  striking  fact  shown  by  the  table  is  the  large  pro- 
portion of  persons  receiving  incomes  of  less  than  $214  a 
year,  the  minimum  taxable  income.  It  shows  the  poverty 
of  the  mass  of  the  people  as  well  as  the  concentration  of 
wealth  among  the  few  rich.  In  the  United  States,  where 
the  natural  resources  have  been  so  much  richer  than  in 
Germany,  a  similar  table  would  probably  show  a  much 
smaller  proportion  under  the  Prussian  minimum,  but  on 
the  other  hand  it  would  probably  show  a  greater  concen- 
tration of  income  in  the  hands  of  a  few.  Europe  has  as 
yet  no  billionaire. 

Causes  of  Fortunes  in  the  United  States 

The  great  fortunes  of  the  United  States  have  been  made 
possible  by  the  unrivaled  opportunities  for  the  exploita- 
tion of  rich  natural  resources,  the  appropriation  of  natu- 
ral monopolies,  and  by  special  privileges  and  opportuni- 
ties in  manufactures  and  transportation.  The  importance 
of  monopoly  privileges  in  the  distribution  of  wealth  is 
well  shown  by  the  results  of  an  investigation  made  in 
1892  by  the  New  York  Tribune  into  the  sources  of  the 
fortunes  of  millionaires.  It  was  undertaken  to  show  that 
protection  was  not  the  main  cause;  but  while  it  proved 
this,  it  showed  clearly  that  most  of  them  were  built  up 
on  monopoly. 

Of  the  4,047  millionaires  reported,  only  1,125,  or  28  per  cent, 
obtained  their  fortunes  in  protected  industries.  *  *  *  About 
78  per  cent  of  the  fortunes  were  derived  from  permanent 
monopoly  privileges,  and  only  22  per  cent  from  competitive  in- 
dustries unaided  by  natural  and  artificial  monopolies.     *     *     * 


Distribution  213 

Furthermore,  if  the  size  of  fortunes  is  taken  into  account  it 
will  be  found  that  perhaps  95  per  cent  of  the  total  values  repre- 
sented by  these  millionaire  fortunes  is  due  to  those  investments 
classed  as  land  values  and  natural  monopolies,  and  to  competitive 
industries  aided  by  such  monopolies.^ 

It  is  essential  to  the  stability  of  our  democratic  insti- 
tutions that  all  special  privileges  be  absolutely  prohib- 
ited and  that  monopoly  be  brought  under  strict  govern- 
ment control  and  regulation.  Improper  methods  of 
wealth  accumulation  should  certainly  be  prevented. 

Tendencies 

The  opposite  question  of  poverty  has  already  been  dis- 
cussed and  some  of  the  causes  of  poverty  pointed  out.  It 
will  be  sufficient  here  to  try  to  answer  the  question  which 
has  often  been  asked :  Are  the  rich  growing  richer  and 
the  poor,  poorer"?  Though  the  first  part  of  the  question 
has  just  been  affirmed,  the  second  part  may  be  denied. 

The  nineteenth  century  has  witnessed  a  vast  improve- 
ment in  the  condition  of  the  laboring  man,  who  has  shared 
in  the  increasing  wealth  which  he  has  helped  to  produce. 
Wages  have  steadily  increased,  the  hours  of  labor  have 
been  reduced,  and  the  material  well-being  of  the  wage- 
earner  is  greater  today  than  it  has  ever  been  before.  It 
has  more  than  once  been  pointed  out  by  writers  on  this 
subject  that  with  an  equal  distribution  of  wealth  no  one 
would  be  rich,  while  many  others  insist  that  inequality  in 
itself  is  a  desirable  thing. 

Greater  diffusion  of  wealth  can  come  about  only  by 
very  slow  processes,  and  permanent  plenty  can  be  se- 
cured only  by  a  great  increase  in  the  accumulations  of 

B  Commons,  The  Distribution  of  Wealth,  p.  252. 


214  Business  Economics 

capital  and  the  efficiency  of  each  worker.  Any  suggested 
reform,  therefore,  that  would  weaken  the  motives  to 
thrift  and  industry  must  be  rejected. 

TEST  QUESTIONS 

1.  What  are  the  three  great  problems  of  economic  society? 

2.  What  is  meant  by  functional  distribution?     What  four 
factors  enter  into  functional  distribution? 

3.  What  is  meant  by  personal  distribution?    What  problems 
are  involved? 

4.  Are  the  different  factors  of  distribution  governed  by  nat- 
ural law?    Illustrate. 

5.  What  are  the  two  different  meanings  given  to  the  word 
"rent"? 

6.  What  factors  determine  economic  rent?    What  is  the  con- 
tention of  the  Socialists  with  respect  to  economic  rent? 

7.  Why  did  the  statesmen  and  church  leaders  in  former  times 
oppose  interest? 

8.  Distinguish  between  borrowing  for  a  productive  purpose 
and  borrowing  to  pay  livmg  expenses. 

9.  Just  exactly  what  is  the  nature  of  interest? 

10.  What  is  meant  by  profits?    What  is  Walker's  theory  con- 
cerning profits? 

11.  Do  profits  ever  come  out  of  wages?     Explain. 

12.  What  is  meant  by  wages?     What  three  theories  are  held 
concerning  wages?     Which  seems  most  reasonable? 

13.  Name  the  factors  that  cause  the  economic  powers  of  differ- 
ent individuals  to  differ  from  one  another. 

14.  Explain  the  distribution  of  fortunes  within  the  United 
States.    What  problems  does  it  raise? 


CHAPTER  XVI 
saving  and  spending 

The  Rational  Use  of  Wealth 

The  goal  and  purpose  of  all  economic  activities  is  the 
satisfaction  of  human  wants.  The  object  of  production 
is  consumption.  We  work  because  we  desire  and  need 
various  things  which  we  can  get  only  if  we  produce  them 
or  earn  the  money  to  buy  them.  In  this  chapter  we  take 
up  some  of  the  problems  connected  with  the  rational  use 
or  consumption  of  the  wealth  which  is  continually  being 
produced.  We  have  seen  something  of  the  conditions 
under  which  it  is  produced  and  the  manner  in  which  it 
is  distributed ;  w^e  must  now  study  the  not  less  important 
subject  of  its  application  to  human  needs  and  desires. 

The  practical  importance  of  this  subject  of  business 
management  is  well  known.  Industry  caters  to  wants. 
Economic  activities  are  motivated  by  this  fundamental 
principle.  The  steel  industry,  for  example,  has  reached 
its  present  magnitude  because  of  the  enlarged  demands 
for  steel  in  machinery,  structural  work,  ships,  rails,  steel 
cars,  war  supplies,  etc.  The  infinite  variety  and  amount 
of  human  desires  account  for  the  endless  diversity  and 
increasing  struggle  of  our  modern  industrial  society. 
Considered  from  the  standpoint  of  consumption,  this 
problem  resolves  itself  into  the  great  question :  How  can 
we  get  the  largest  and  most  rational  return  for  a  given 
expenditure  ? 

215 


216 


Business  Economics 


Before  trying  to  answer  this  question,  it  will  be  helpful 
to  present  a  summary  statement  of  actual  expenditures 
in  different  places. 

Expenditures  for  Different  Purposes 


Items 

United 

States 

1903 

New 

YOKK 

City 

Great 
Britain 

Prussia 

Average 

Food   

43.1 
13.0 
18.1 
5.7 
20.1 

43.4 
10.6 
19.4 
5.1 
21.5 

51.4 
18.1 
13.5 
3.5 
13.5 

55.0 
18.0 
12.0 
5.0 
10.0 

48  2 

Clothing   

14.9 

Eent    

15.8 

Fuel  and  light.  . .  . 
Miscellaneous    .... 

4.8 
16.3 

Total 

100.0 

100.0 

100.0 

100.0 

100.0 

From  this  table  it  is  seen  that  practically  half  of  the 
income  of  average  working-class  families  is  expended  for 
food  and  five-sixths  of  it  goes  for  the  bare  necessaries. 
It  is  therefore  of  the  utmost  importance  that  this  be  spent 
wisely.  The  remaining  one-sixth,  included  here  under  the 
head  "miscellaneous,"  comprises  such  items  as  educa- 
tion, care  of  health,  comfort,  mental  and  bodily  recrea- 
tion, etc.  It  is  manifest  that  this  group  can  be  expanded 
in  only  one  of  two  ways :  either  by  enlarging  the  total  in- 
come or  by  economizing  on  the  other  items  by  a  wiser  and 
better-ordered  expenditure.  The  former  question  has 
already  been  discussed ;  here  we  are  concerned  only  with 
the  latter. 

Dr.  Frederick  Engel,  a  Prussian  statistician,  laid  down 
certain  laws  with  regard  to  consumption.  As  the  income 
of  a  family  increases  a  smaller  percentage  is  spent  for 
food  and  a  larger  percentage  for  education,  health,  recre- 


Saving  and  Spending 


217 


ation,  etc.,  while  the  percentage  spent  for  clothing,  rent, 
fuel,  and  light  remains  approximately  the  same.  A 
higher  civilization  and  culture  for  the  mass  of  the  people 
can  be  secured  only  by  expanding  the  group  of  culture 
expenditures.  As  long  as  these  remain  unsatisfied  for  the 
ordinary  family  we  cannot  claim  to  have  attained  our 
economic  goal.     The  author  of  a  recent  study  of  condi- 


The  Survey 
Fig.  10. — Distribution  of  a  Family  Income,  $900  to  $1,000 

tions  in  New  York  City,  where  the  cost  of  living  is  high, 
concludes  that  a  ''fair  living  wage  for  a  workingman's 
family  in  New  York  City  should  be  at  least  $728  a  year, 
or  a  steady  income  of  $14  a  week. ' '  ^  The  actual  average 
earnings  are  certainly  below  this  figure. 

The  table  on  the  following  page  shows  the  average  in- 
come and  expenditure  of  a  number  of  families  in  New 
York  City  as  determined  by  actual  investigation. 

1  More,  Wage-earners '  Budgets,  p.  269. 


218 


Business  Economics 
Income  and  Expenditure  ^ 


Items  of  Expenditure 

Group  I 

Income, 

$60O-$699; 

Average, 

$650 

Group  II 

Income, 

$700- $799: 

Average, 

$748 

Group  III 
Income, 

$800- $899; 

Average, 

$846 

Eent   

$154 

11 

38 

6 

13 

279 

11 

83 

14 

8 

3 

5 

25 

$650 

$161 

10 

37 

8 

18 

314 

22 

99 

14 

9 

6 

5 

32 

$735 

$168 

Car  fare 

16 

Fuel  and  light       

41 

Furniture 

7 

Insurance   

18 

Food 

341 

Meals  eaten  away  from  home .... 
Clothing  

18 
114 

Health    

22 

Taxes,  dues,  and  contributions .  . . 

Eecreation  and  amusement 

Education  

11 

7 
7 

Miscellaneous 

41 

Totals 

$811 

In  this  connection  the  factors  that  influence  and  deter- 
mine the  cost  of  living  may  be  briefly  summarized : 

FACTORS  THAT  DETERMINE  THE  COST  OP  LIVING  ^ 

I.     Cost  of  living  includes: 

1,  Economic  expenditures,  or  such  as  contribute  to  effi- 
ciency 

a.  Rent 

b.  Food  --^^ 

c.  Clothing 

d.  Fuel  and  light 

e.  Sundries,    including   outlay   for   health,    recreation, 

amusement,  education,  religion,  and  government 

2  Report  of  Special  Committee  on  Standard  of  Living  in  New  York  City. 

3  Adapted  from  the  Eeport  of  the  (Massachusetts)   Commission  on  the 
Cost  of  Living  (1910). 


Saving  and  Spending  219 

2.  Uneconomic  expenditures,  or  such  as  do  not  contribute 
to  efficiency 

A.  Individual  wastage 

a.  Drink 

b.  Luxury 

c.  Amusement 

d.  Domestic  waste 

B.  Social  wastage 

a.  War 

b.  Governmental  extravagance 

c.  Crime,  pauperism,  insanity,  accident,  disease,  un- 

employment, and  the  like 
II.     The  cost  of  living  should  be  considered  not  only  absolutely, 
as  above,  but  relatively,  as  shown  by  proportion  of  ex- 
penditures to  incomes: 

1.  Wages 

2.  Salaries 

3.  Profits 

4.  Interest 

5.  Leisure 

6.  Idleness 

III.     The  prices  of  commodities  and  services  which  constitute 
the  items  of  expenditure  classified  above,  are  determined 
by  supply,  by  demand,  and  by  value  of  money,  as  fol- 
lows: 
1.  Supply  depends  on  expenses  of  production 

a.  Natural  resources  and  marginal  productivity  of  land 

b.  Ordinary  competitive  expenses 

(1)  Interest  on  capital 

(2)  Profits  of  management 

(3)  Cost  of  labor,  as  determined  by  wages,  hours, 

and  efficiency 
e.  Effects  of  legislation 

(1)  Sanitary  laws 

(2)  Pure  food  laws 

(3)  Labor  laws 

(4)  Tariff  laws 


220  Business  Economics 

d.  Effects  of  combination 

(1)  Capital — trusts 

(2)  Labor — unions 

e.  Effects  of  wastage 

(1)  Public  and  private  extravagance 

(2)  Planless  and  wasteful  methods  of  production 

and  distribution 

f.  Effects  of  improvements  and  inventions 

2.  Demand  depends  on 

a.  Size  and  growth  of  population,  as  governed  by  birth 

rate,  death  rate,  and  immigration 

b.  Amount  of  incomes 

c.  Standard  of  living,  as  influenced  by  advance  of  cul- 

ture, growth  of  cities,  custom  and  fashion,  habits 
of  spending  and  saving 

3.  Value  of  money  depends  on 

a.  Supply  of  gold 

b.  Currency  system 

c.  Use  of  credit 

Economy  in  Consumption 

These  facts  empliasize  the  importance  of  economy  in 
consumption.  It  is  said  that  an  American  family  will 
waste  enough  food  for  a  French  family  to  live  on.  The 
farmer  who  leaves  his  implements  out  in  the  rain  or  his 
cattle  without  proper  shelter,  is  guilty  of  waste.  We  all 
waste  clothing  by  frequent  changes  in  fashion.  Such 
waste  is  due  as  much  to  a  lack  of  knowledge  and  training 
as  to  carelessness.  The  single  example  of  the  consump- 
tion of  food  will  illustrate  this  point. 

If  we  place  the  average  income  of  an  American  family  at 
$500 — and  it  will  not  greatly  exceed  that  figure — then  nearly 
$250  of  this  amount  is  expended  each  year  for  food.  Waste 
occurs  in  any  or  all  of  the  following  ways:     (1)  needlessly  ex- 


Saving  and  Spending  221 

pensive  foods  containing  little  real  nutriment  are  used;  (2) 
there  is  a  failure  to  select  the  foods  best  suited  to  the  needs  of 
the  family;  (3)  a  great  deal  is  thrown  away  which  ought  to  be 
utilized;  (4)  bad  preparation  of  the  food  causes  it  to  lose  much 
of  the  nutriment  which  it  does  contain;  (5)  badly  constructed 
ovens  diffuse  heat,  instead  of  confining  it,  and  cause  enormous 
loss  of  fuel.  We  shall  state  less  than  the  truth  if  we  estimate 
that  fully  one-fifth  of  the  money  expended  for  food  is  absolutely 
wasted,  while  the  excessive  expenditure  often  fails  to  provide 
adequate  nutrition.^ 

The  remedy  for  such  a  waste  as  this  clearly  lies  in  the 
teaching  of  domestic  science  in  our  public  schools  to  the 
daughters  and  future  wives  of  the  workingTnen.  As  the 
ordinary  household  expenses,  as  shown  above,  absorb 
from  80  to  90  per  cent  of  the  ordinary  income,  the  train- 
ing of  the  housewife,  under  whose  control  they  fall,  is 
almost  as  imperative  as  that  of  the  wage-earner. 

The  Relation  of  Consumption  to  Productive 
Efficiency 

The  economic  evils  of  intemperance  will  be  more  fully 
stated  below  in  the  objections  to  luxury.  There  is, 
however,  one  additional  objection  to  the  excessive  use  of 
intoxicating  liquor  which  is  not  true  of  most  indulgences, 
and  that  is  the  fact  that  it  diminishes  a  man's  productive 
powers.  It  is  harmful  in  its  effects  both  upon  consump- 
tion and  upon  production. 

Other  items  of  consumption  appear,  however,  not  so 
clearly  under  the  immediate  control  of  the  consumer. 
The  housing  accommodations  in  many  of  our  large  cities 
have  often  been  unsanitary  and  unworthy  of  being  called 
homes.     Legislation  has  been  necessary  to  compel  the 

6  Bullock,  Introduction  to  Study  of  Economics,  p.  106. 


222  Business  Economics 

erection  of  better  tenements  and  to  prevent  the  exploita- 
tion of  helpless  people.  So  too  it  has  been  found  neces- 
sary to  legislate  against  loan-sharks,  in  order  to  protect 
people  against  their  own  improvidence  and  ignorance. 
In  addition  to  legislation  against  positive  evils,  we  must 
of  course  look  to  education  as  the  great  remedy  of  waste 
in  consumption. 

There  is  one  other  phase  of  the  subject  of  consumption 
that  may  well  be  mentioned  before  leaving  this  subject. 
Owing  to  the  constant  pressure  of  the  consuming  public 
for  cheap  goods,  many  articles  are  produced  under  con- 
ditions dangerous  to  the  health,  morality,  and  well-being 
of  the  operatives,  as  in  the  case  of  the  "sweated"  trades. 
To  remedy  these  evils  consumers'  leagues  have  been 
started  in  many  places,  the  members  of  which  pledge 
themselves  not  to  buy  goods  or  to  trade  in  stores  where 
the  conditions  of  work  are  not  up  to  certain  prescribed 
standards.  They  realize  that  as  consumers  they  owe  a 
duty  to  other  members  of  society  not  to  exploit  them. 
While  this  method  has  proved  a  fairly  effective  method 
of  protest  in  some  cases,  it  cannot  be  looked  to  as  a  com- 
plete solution  of  this  evil.  But  it  emphasizes  the  fact  that 
the  interests  of  all  members  of  society  as  producers  and 
consumers  are  closely  interdependent  and  that  the  prog- 
ress of  society  requires  the  improvement  of  the  condition 
of  all. 

The  Nature  of  Saving  and  Spending 

One  of  the  problems  which  has  often  proved  very  puz- 
zling is  the  relation  between  saving  and  spending.  At 
what  point  should  one  stop  spending  in  order  to  save?  If 
the  satisfaction  of  our  wants  is  the  object  of  production, 
why  should  we  save  at  all?  This  is  the  point  urged  by  the 
author  of  a  specious  little  book  entitled  The  Fallacy/  of 


Saving  and  Spending  223 

Saving.  The  problem  can  be  most  easily  solved  by  a 
more  careful  analysis  of  terms.  In  the  popular  view, 
saving  involves  the  withdrawal  of  goods  or  money  from 
use,  while  spending  means  putting  them  to  immediate  use. 
The  spendthrift  is  proverbially  popular.  "If  the  rich 
do  not  spend,  the  poor  die  of  hunger,"  said  Montesquieu. 
Saving  may  take  the  form  of  hoarding,  or  witlidrawing 
things  from  use,  but  nowadays  this  is  practiced  only  by 
misers;  saving  ordinarily  takes  the  form  of  investment 
in  some  productive  enterprise,  either  directly  or  through 
a  bank.  In  this  way  a  demand  is  created  for  goods  just 
as  truly  as  though  the  money  had  been  spent  for  a  dinner 
or  a  suit  of  clothes.  Saving  is  spending,  but  it  is  spend- 
ing for  the  future  rather  than  for  the  present ;  it  usually 
causes  the  production  of  permanent  material  goods 
rather  than  transient  or  immaterial  pleasures. 

Another  cause  of  the  confusion  of  ideas  on  this  sub- 
ject is  that  we  always  speak  of  money  and  thus  lose  sight 
of  the  acts  of  production  and  consumption  that  lie  back 
of  the  money  transfer.  We  see  that  money  is  transferred 
by  spending  and  think  that  it  increases  trade.  Conse- 
quently when  a  prodigal  spends  his  money  foolishly,  it  is 
excused  on  the  ground  that  it  makes  employment  and 
puts  money  in  circulation.  We  forget  that  it  would  have 
been  put  in  circulation  just  as  effectively  if  he  had  not 
spent  it,  but  had  placed  it  in  a  bank.  If  we  look  back  of 
the  money  transfer,  we  see  that  usually  there  has  been 
a  foolish  or  wasteful  expenditure,  sometimes  an  absolute 
destruction  of  wealth.  A  fire  which  burns  down  valuable 
buildings  is  an  absolute  social  loss,  even  though  employ- 
ment be  given  to  masons  and  carpenters  in  putting  them 
up  again. 


224  Business  Economics 

The  Fallacy  op  Making  Work 

A  third  confusion  of  ideas  that  exists  in  the  popular 
mind  is  due  to  an  over-emphasis  of  the  desirability  of 
work  for  its  own  sake.  The  man  who  "makes  work"  is 
thought  to  be  doing  a  desirable  thing,  even  though  this  re- 
sults from  the  unnecessary  destruction  of  useful  things. 
Now  the  real  goal  of  all  rational  economic  endeavor  is  not 
production  for  its  own  sake,  but  consumption ;  not  work, 
but  the  gratification  of  wants.  Every  destruction  of  du- 
rable commodities  which  lessens  the  power  to  gratify 
wants  is  a  loss  to  a  community  and  no  juggling  with  words 
can  make  it  anything  else.  If  it  gives  employment  to  la- 
bor, this  means  that  the  labor  has  been  diverted  from  the 
production  of  other  things  to  which  it  would  have  been  de- 
voted. Every  year  fires  destroy  property  in  the  United 
States  to  the  value  of  $250,000,000.  That  workmen  are 
employed  to  reproduce  the  buildings,  etc.,  can  surely 
not  be  reckoned  as  a  social  gain.  There  is  great  danger 
in  a  commercial  age  like  ours  of  forgetting  that  work  is 
not  an  end  in  itself  but  simply  a  means  to  an  end. 

But  it  may  be  argued  that  unless  these  men  had  been 
given  employment  of  this  sort,  they  would  have  starved. 
It  is  conceivable  that  during  or  after  a  revolution,  indus- 
try would  be  so  interrupted  that  ordinary  employments 
would  not  be  open.  But  in  ordinary  times  such  a  state- 
ment is  simply  an  assertion  of  the  fallacious  lump-of- 
labor  theory,  that  there  is  just  so  much  work  to  be  done 
and  no  more.  As  a  matter  of  fact  new  wants  are  contin- 
ually pressing  for  satisfaction,  waiting  only  for  the  prior 
ones  to  be  satisfied  before  they  urge  their  claims.  So 
soon  as  the  old  ones  are  satisfied,  additional  employment 
is  provided  in  meeting  the  newer  desires.  The  aim 
of  society  is  to  expand  continually  the  circle  of  gratified 


Saving  and  Spending  225 

desires.  As  durable  goods  and  agents  are  accumulated  by 
the  process  of  saving,  this  becomes  increasingly  possible 
in  every  progressive  society.  Useless  destruction  in- 
volves sheer  waste  and  cannot  be  justified  on  any 
grounds. 

UsETUL  Savings 

On  the  other  hand  saving  is  socially  necessary  in  every 
industrially  developed  community  in  order  to  furnish  the 
requisite  capital  for  the  continued  production  of  wealth. 
Professor  Marshall  has  estimated  that  every  year  one- 
fifth  of  the  wealth  of  a  nation  is  used  up  in  the  processes 
of  manufacture  and  production;  just  to  keep  machines, 
factories,  railroads,  and  other  instruments  of  production 
up  to  the  point  of  efficiency  and  to  restore  loss  and  de- 
preciation would  therefore  require  considerable  saving. 
If  the  nation  is  to  grow  wealthier  and  is  to  accumulate 
additional  capital,  manifestly  still  more  must  be  saved. 
This  is  done  in  all  progressive  countries. 

Saving  is  carried  on  by  individuals,  however,  and  not 
by  nations,  and  the  motives  that  lead  to  it  are  personal. 
The  most  important  is  probably  the  desire  to  provide  for 
wife  and  children  or  other  relatives;  next  to  that  is  the 
wish  to  lay  by  sufficient  for  one's  old  age.  In  our  indi- 
vidualistic society,  where  each  family  forms  an  independ- 
ent unit  and  is  assumed  to  be  self-supporting,  it  is  very 
desirable  that  habits  of  thrift  and  saving  be  developed. 
Both  from  a  social  and  a  personal  point  of  view  therefore 
saving  must  be  approved,  though  it  is  undesirable  that 
it  should  proceed  so  far  as  to  prevent  spendiog  for  the 
gratification  of  essential  present  needs. 

The  Waste  of  Luxueies 

But  what  shall  we  say  about  expenditures  for  luxuries? 
Here  the  spending  is  for  the  gratification  of  a  want, 


226  Business  Economics 

though  it  may  be  out  of  proportion  to  the  results.  What 
shall  be  our  attitude  to  it?  This  question  is  not  so  easy 
to  answer  as  the  other.  Three  different  schools  have 
given  as  many  answers  to  the  problem  of  luxury.  The 
first  condemns  it  utterly;  the  second  approves  it  wholly; 
and  the  third  takes  an  intermediate  position. 

Luxury  is  condemned  by  the  first  school  of  thinkers 
from  three  points  of  view:  (1)  As  a  question  of  individ- 
ual morals  it  is  regarded  as  debasing  and  enervating, 
thus  preventing  the  highest  development  of  the  human 
faculties;  (2)  as  a  question  of  economics  it  is  condemned 
as  wasteful;  and  (3)  as  a  question  of  right  and  justice  it 
is  incompatible  with  an  equitable  distribution  of  wealth. 
It  is  upon  this  last  point  that  the  opponents  of  luxury 
lay  the  greatest  emphasis.  As  the  quantity  of  existing 
wealth  is  insufficient  to  satisfy  even  the  primal  wants  of 
the  large  majority  of  our  fellow-creatures,  we  should  en- 
deavor to  increase  this  available  store  as  much  as  we  can 
and  should  refrain  from  drawing  upon  it  in  a  reckless 
manner  in  order  to  gratify  superfluous  wants.  Further- 
more the  productive  powers  that  we  can  use  are,  as  a 
matter  of  fact,  limited;  and  therefore  if  the  wealthy 
classes  divert  a  portion  of  these  forces  toward  the  pro- 
duction of  articles  of  luxury,  there  will  be  so  much  the 
less  available  for  the  production  of  those  staple  articles 
that  the  masses  require  for  their  consumption. 

In  the  case  of  a  Robinson  Crusoe  this  would  be  clear. 
If  he  devoted  several  months  to  the  polishing  of  a  dia- 
mond for  ornament,  he  would  have  to  go  without  a  house 
or  other  improvements  he  might  have  made  in  that  time. 
Or  if  he  forced  his  man  Friday  to  spend  half  his  time  pol- 
ishing diamonds  for  him,  Friday  might  be  compelled  to 
go  without  sufficient  clothing  or  food  or  housing.  The 
same  thing  is  true  of  organized  society,  only  the  truth  is 


Saving  and  Spending  Til 

hidden  by  the  phenomena  of  exchange.  It  has  been  esti- 
mated ^  that  the  annual  consumption  of  wealth  in  the 
United  States  is  divided  somewhat  as  follows:  necessa- 
ries, six  billion  dollars;  luxuries,  three  and  one-half  bil- 
lion (of  which  nine  hundred  million  dollars  go  for  liquor 
and  five  hundred  million  dollars  for  tobacco) ;  capitalistic 
uses,  three  and  three-quarter  billion.  It  is  manifest  that 
if  the  expenditure  for  luxuries  were  curtailed  or  aban- 
doned, there  would  be  more  to  devote  to  the  other 
categories. 

The  Need  of  Luxukies 

The  opposite  school  replies  to  these  arguments  that 
luxury  is  an  indispensable  stimulus  to  progress;  that 
really  all  economic  progress  is  first  manifested  in  the 
form  of  a  need  of  luxury,  and  that  luxury  therefore  is  a 
necessary  phase  of  its  development.  Since  luxury  is 
wholly  relative,  every  want  or  need  is,  on  its  first  appear- 
ance in  the  world,  regarded  as  superfluous  (1)  because 
no  one  has  hitherto  wanted  it,  and  (2)  because  its  produc- 
tion probably  requires  a  considerable  amount  of  labor, 
on  account  of  man's  experience  and  the  inevitable  grop- 
ings  in  the  dark  that  attend  all  beginnings.  The  decen- 
cies of  life  today  and  even  the  necessities  were  once  re- 
garded as  luxuries — chimneys  in  houses,  shoes,  forks  and 
knives,  linen  for  the  body,  bath  tubs,  etc.  If  all  luxury 
had  always  been  sternly  suppressed  when  it  made  its  ap- 
pearance, all  the  needs  that  constitute  civilization  would 
have  been  nipped  in  the  bud,  and  we  should  still  be  in  the 
condition  of  our  ancestors  of  the  Stone  Age.  Civilization 
depends  on  the  multiplication  of  wants.    Economic  prog- 

*  Gide,  Political  Economy,  Rev.  Ed.,  p.  663. 


228  Business  Economics 

ress  is  a  process  of  converting  superfluities  into  conven- 
iences and  conveniences  into  necessities. 

The  Inteemediate  View 

The  attitude  taken  by  practically  all  economists  today 
is  intermediate  between  these  two  extremes.  Moderate 
luxury  is  justified,  but  lavish  and  indiscriminate  luxury 
is  disapproved.  This  justification  of  luxury  rests  upon 
purely  economic  grounds.  In  so  far  as  personal  con- 
sumption is  the  objective  point  of  production,  the  pro- 
hibition of  luxury  would  act  as  an  impediment  to  enter- 
prise. If  the  desire  to  enjoy  luxuries  stimulates  the 
productive  powers  of  economically  important  members 
of  society,  it  is  justifiable  as  a  necessary  motive  force. 

The  introduction  of  luxuries  and  the  consequent  raising 
of  the  standard  of  living  seem  often  the  only  way  to  se- 
cure progress.  If  the  mass  of  the  people  live  on  the 
minimum  of  cheap  food,  multiply  as  long  as  cheap  food  is 
to  be  had,  and  spend  little  for  comforts  and  luxuries, 
then  most  of  the  labor  of  such  a  community  must  be  spent 
in  obtaining  food  for  the  masses.  Such  is  the  condition 
in  India  and  China.  But  if  a  large  part  of  the  community 
has  a  higher  standard  of  living,  it  will  exercise  self-re- 
straint in  the  increase  of  its  numbers,  and  the  whole  level 
of  intelligence  and  comfort  will  be  raised,  as  is  the  case 
in  France,  Switzerland,  and  New  England. 

On  the  other  hand,  it  is  urged  that  * '  failure  on  the  part 
of  any  family  to  secure  the  necessaries  of  life  is  injurious, 
not  only  to  it,  but  to  the  whole  conmiunity.  Under-con- 
sumption  means  under-nutrition  and  loss  in  industrial 
efficiency.  If  permitted  to  continue  it  must  inevitably 
undermine  the  standards  which  make  a  family  self-sup- 
porting and  self-sufficient  and  reduce  its  members  to 
dependency.     The  general  interest  requires,  therefore, 


Saving  and  Spending  229 

acceptance  of  the  maxim :  the  consumption  of  luxuries 
should  be  deferred  until  all  are  provided  with  neces- 
saries. *  *  *  This  suggests  that  no  one  is  justified 
in  spending  income  for  a  luxury  for  himself  or  his  family 
that  will  afford  less  happiness  than  would  the  same  in- 
come spent  for  someone  else."^ 

The  Socialization  of  Wealth 

But  the  difficult  question  at  once  suggests  itself :  How 
can  the  surplus  incomes  of  the  rich  be  used  so  as  to  pro- 
vide for  the  needs  of  the  poor,  without  undermining  their 
independence  or  permanently  lowering  their  earning 
power?  It  has  been  suggested  that  there  should  be  a  so- 
cialization of  luxury ;  that  the  rich  should  use  their  wealth 
for  the  construction  of  public  art  galleries,  libraries, 
parks,  baths,  etc.,  which  would  thus  gratify  as  great  a 
number  as  possible.  The  feeling  is  growing  in  the  United 
States  and  in  the  world  that  wealth  is  a  social  trust  and 
that  the  ownership  of  wealth  imposes  upon  a  person  cer- 
tain moral  obligations.  While  every  man  has  a  legal 
right  to  spend  his  surplus  income  as  he  pleases,  he  is 
morally  bound  to  spend  it  in  such  a  way  as  to  increase 
the  welfare  of  the  whole  community. 

TEST  QUESTIONS 

1.  What  is  the  main  purpose  of  all  economic  activities? 

2.  In  their  order  of  importance,  what  are  the  chief  items  in 
the  expenditure  of  family  incomes?  How  do  these  proportions 
vary  with  different  incomes? 

3.  What  are  the  chief  economic  expenditures  in  the  cost-of- 
living  problem?    What  are  the  chief  uneconomic  expenditures? 

4.  What  three  factors  determine  the  prices  of  commodities? 

5  Seager,  Principles  of  Economics,  p.  80. 


230  Business  Economics 

5.  Which  factor  has  been  most  influential  in  determining  the 
rising  cost  of  living  in  the  United  States  during  the  years 
1895-1910?    Explain. 

6.  "What  is  meant  by  saving?  How  does  it  differ  from  hoard- 
ing? 

7.  What  is  the  economic  fallacy  in  the  making-work  argu- 
ment? 

8.  About  how  much  of  the  wealth  of  a  country  is  annually 
destroyed  in  the  processes  of  manufacture  and  production? 
How  is  it  replaced? 

9.  Mention  some  desirable  economies  in  consumption. 

10.  What  is  the  relation  of  consumption  to  productive  effi- 
ciency ? 

11.  What  arguments  are  put  forth  condemning  luxury? 

12.  What  arguments  are  advanced  to  show  that  luxury  is  an 
indispensable  stimulus  to  progress? 

13.  What  is  the  rational  attitude  toward  luxuries? 


CHAPTER  XVII 
taxation  and  tariff 

The  Nature  of  Taxes 

In  no  way  does  the  state  affect  the  interests  of  its  citi- 
zens more  vitally  than  in  the  sphere  of  taxation.  The 
state  in  modern  society  is  the  people  organized  for  cer- 
tain collective  purposes,  as  for  the  public  defense,  the 
preservation  of  domestic  peace,  and  the  furtherance  of 
social  and  industrial  welfare.  To  carry  out  these  objects 
money  is  needed  and  the  state  has  therefore  to  collect 
from  its  citizens  sufficient  revenue  to  defray  its  expendi- 
tures. John  Fiske  has  tersely  defined  taxes  as  '*  portions 
of  private  property  taken  for  public  purposes."  Taxa- 
tion thus  implies  a  certain  degree  of  compulsion;  by  it 
the  government  interferes  with  the  free  choice  of  the  in- 
dividual and  expends  a  part  at  least  of  his  income  for 
him  in  ways  that  he  himself  might  not  have  chosen.  The 
social  and  industrial  consequences  of  a  system  of  taxation 
may  also  be  far-reaching  and  important.  As  Professor 
R.  T.  Ely  says : 

Taxation  may  create  monopolies,  or  it  may  prevent  them ;  it 
may  diffuse  wealth,  or  it  may  control  it;  it  may  promote  labor 
or  equality  of  rights,  or  it  may  tend  to  the  establishment  of 
tyranny  and  despotism;  it  may  be  used  to  bring  about  reform, 
or  it  may  be  used  to  aggravate  existing  grievances  and  foster 
dissensions  between  classes. 

231 


232  Business  Econotnics 

It  is  evident  therefore  that  the  utmost  care  should  be 
exercised  in  framing  a  system  of  taxation. 

Rules  of  Taxation 

Certain  canons  or  rules  of  taxation  were  laid  down  by 
Adam  Smith  over  a  hundred  years  ago  and  have  been 
generally  endorsed  by  economists  ever  since.  One  was 
that  taxes  ought  to  be  certain  and  not  arbitrary  as  to 
amount,  time,  and  manner  of  payment ;  another  was  that 
taxes  ought  to  be  levied  in  the  manner  most  convenient 
to  the  tax-payer ;  and  a  third,  that  taxes  ought  to  take  as 
little  as  possible  out  of  the  pockets  of  the  tax-payer  over 
and  above  what  is  paid  into  the  public  treasury.  These 
three  maxims — certainty,  convenience,  and  economy — 
have  been  generally  accepted,  but  less  general  agreement 
exists  in  regard  to  the  fourth,  which  states  that  the  sub- 
jects of  every  state  ought  to  contribute  to  the  support 
of  the  government  as  nearly  as  possible  in  proportion  to 
their  respective  abilities. 

This  rule  has  given  rise  to  two  problems :  Is  ability  the 
most  just  basis  of  taxation?  If  so,  how  is  ability  to  be 
measured?  The  theory  of  justice  generally  accepted  by 
legal  writers  and  by  the  American  courts  is  expressed  in 
the  maxim  that  taxes  should  be  proportioned  to  benefits 
received.  The  benefit  theory  affords  a  good  rule  in  the 
assessment  of  local  property  taxes,  but  fails  utterly  in 
the  domain  of  national  and  state  affairs.  Who  can  meas- 
ure the  benefits  to  each  individual  of  an  appropriation 
for  a  new  warship  or  for  a  state  penitentiary  or  for  the 
public  school  system? 

Probably  the  benefits  are  in  inverse  proportion  to  the 
income  or  wealth  of  the  individual,  and  the  heaviest  taxes 
would  then  have  to  be  apportioned  to  those  least  able  to 
pay.    Most  economists  today  agree  that  taxes  should  be 


Taxation  and  Tariff  233 

apportioned  according  to  "faculty"  or  ability  to  pay.  It 
satisfies  better  our  sense  of  fairness  and  is  more  readily 
applicable  than  the  benefit  theory.  In  the  last  analysis, 
of  course,  it  may  be  said  that  taxation  in  general  must 
confer  real  benefits  upon  society  or  it  mil  not  be  tol- 
erated. Here,  however,  we  are  concerned  with  a  rule  of 
apportionment. 

Bases  of  Taxation 

The  second  practical  problem  encountered  is  when  we 
attempt  to  apply  the  faculty  principle  in  practice.  How 
is  ability  to  be  measured?  Three  measures  have  been 
suggested:  expenditure,  income,  and  property.  Taxa- 
tion on  expenditure  is  open  to  the  objection  that  it  would 
place  an  unduly  large  proportion  of  the  tax  burdens  on 
the  poor,  whose  expenditures  are  larger  in  proportion  to 
their  means  than  those  of  other  classes  of  society.  To 
make  property  the  sole  base  of  taxation  is  objectionable 
because  large  classes  of  society,  including  professional 
men  with  large  incomes,  w^ould  then  escape  taxation 
largely  or  altogether.  Income,  on  the  surface,  seems  the 
fairest  measure  of  ability,  but  is  objectionable  because 
the  incomes  of  different  individuals,  both  on  account  of 
source  and  size,  really  indicate  unequal  and  dissimilar 
abilities.  In  practice,  however,  all  three  methods  are  em- 
ployed in  all  advanced  states;  so  it  is  not  necessary  to 
decide  which  is  theoretically  the  fairest. 

Progressive  Taxes 

Still  another  practical  question  confronts  us  after  we 
adopt  the  ability  theory :  Shall  the  rate  of  taxation  be  the 
same  no  matter  what  the  amount  of  the  property 
or  income,  or  shall  it  increase  as  the  amount  grows 
larger?    In  other  words,  shall  taxation  be  proportional 


234  Business  Economics 

or  progressive?  In  general  the  advocates  of  the  ability 
theory  also  support  progression,  though  there  are  many 
exceptions  to  this  statement.  Three  main  arguments 
have  been  urged  in  support  of  this  method. 

First,  progression  is  advocated  in  order  to  secure 
equality  of  sacrifice;  it  is  argued  that  each  dollar  of  a 
$10,000  income  affords  less  gratification  to  the  owner 
than  each  dollar  of  a  $1,000  income,  and  that  conse- 
quently in  order  to  equalize  the  sacrifices  of  the  two  in- 
dividuals a  larger  proportion  of  the  first  income  should 
be  taken  than  of  the  second.  However,  the  objection  to 
this  is  that  wants  expand  even  more  rapidly  than  in- 
comes and  therefore  the  initial  assumption  is  untrue. 

Progression  is  urged,  in  the  second  place,  by  those  who 
desire  to  use  taxation  as  a  method  of  introducing  social 
reforms  or  of  bringing  about  a  more  equitable  distribu- 
tion of  wealth,  as  by  the  breaking  up  of  large  fortunes. 
It  seems  inadvisable,  however,  to  use  the  machinery  of 
taxation  for  such  purposes. 

Other  writers  urge  that  the  ability  to  earn  or  produce 
wealth  increases  at  an  accelerating  rate,  and  that  taxa- 
tion should  therefore  keep  pace  with  it.  **It  is  the  first 
thousand  that  counts."  The  objection  is  made  here  that 
it  would  penalize  ability  and  energy. 

In  general,  while  tlie  arguments  are  not  conclusive, 
progression  certainly  secures  a  nearer  approach  to  the 
ideal  of  the  ability  theory  than  does  proportional  taxa- 
tion. The  practical  application,  after  we  accept  it,  is  still 
a  difficult  matter.  It  should  be  applied  to  the  revenue 
system  as  a  whole  by  the  careful  selection  of  special  taxes. 
As  a  matter  of  fact  we  have  just  the  opposite  system  in 
the  United  States,  for  the  poor  man  undoubtedly  pays 
out  a  larger  proportion  of  his  income  in  taxes — princi- 
pally on  articles  of  consumption — than  do  his  wealthy 


Taxation  and  Tariff  235 

neighbors.     This  condition  has  been  somewhat  modified 
by  the  use  of  the  income  tax. 

DiEECT  AND  InDIEECT   TaXES 

In  the  main  there  has  been  a  clear  division  in  the 
United  States  between  the  sources  of  income  of  the  fed- 
eral government  on  the  one  hand  and  those  of  the  state 
and  local  governments  on  the  other.  The  federal  treas- 
ury has  derived  its  revenue  almost  entirely  from  indirect 
taxes — excise  and  customs,  while  the  other  governments 
have  depended  chiefly  upon  direct  taxes  upon  persons, 
property,  business,  corporations,  and  inlieritances.  The 
division  rests  upon  the  constitutional  allotment  of 
powders,  but  it  also  corresponds  very  closely  to  the  in- 
dustrial and  political  functions  of  each  in  their  relations 
to  the  indi\ddual  citizens.  The  chief  duty  of  the  federal 
government  is  that  of  national  defense  and  foreign  inter- 
course, relations  which  are  national  in  extent  but  which 
affect  the  individual  only  remotely;  so,  too,  its  taxing 
area  is  national  and  its  exactions  are  felt  only  distantly. 
Few  persons,  it  has  been  said,  taste  the  tax  in  their  tea 
or  their  whisky,  yet  over  one-third  of  all  the  taxes  col- 
lected in  the  United  States  are  derived  from  either  cus- 
toms ».or  excise  duties.  Whisky  and  tobacco  contribute 
most  of  the  internal  revenue,  while  import  duties  are 
levied  on  practically  everything  brought  into  the  coun- 
try which  could  compete  with  any  home  product.  These 
two  sources  yield  over  $600,000,000  a  year  to  the  federal 
treasury. 

During  the  Civil  War  the  sources  of  revenue  of  the 
country  were  supplemented  by  a  Federal  Income  Tax, 
which  remained  in  operation  until  1872.  Such  a  law  was 
again  passed  in  1893,  but  was  declared  unconstitutional 
by  the  Supreme  Court.    The  constitution  has  since  been 


236  Business  Economics 

amended  to  grant  the  federal  government  the  power 
to  levy  an  income  tax  and  such  a  tax  has  been  established 
to  supplement  the  revenue  derived  from  indirect  sources. 
An  income  tax  is  generally  approved  of  by  taxing  au- 
thorities, because  it  is  an  elastic  tax.  The  rates  can  eas- 
ily be  modified  to  meet  the  financial  needs  of  the  govern- 
ment without  upsetting  business  in  the  same  manner  as 
would  be  done  by  a  revision  of  the  tariff  rates  to  meet  the 
demands  of  the  treasury.  It  is  generally  admitted  that  a 
tariif  and  an  excise  tax  are  too  fluctuating  to  be  depend- 
able. A  shock  to  business  will  result  in  an  enormous  de- 
crease in  revenue.  To  attempt  to  adjust  the  tariff  rates 
accordingly  at  such  a  time  would  only  add  to  the  con- 
fusion. The  effect  of  a  slight  change  in  the  rate  of  an  in- 
come tax  does  not  have  this  far-reaching  effect  upon  busi- 
ness and  at  the  same  time  keeps  the  revenues  of  the  gov- 
ernment steadier. 

The  General  Propeety  Tax 

The  main  reliance  of  the  state  and  local  governments 
in  this  country  is  the  general  property  tax,  which 
amounted  in  1902  to  over  $700,000,000,  or  almost  half  of 
all  the  taxes  collected.  This  really  consists  of  two  very 
distinct  parts,  which  present  quite  different  problems, 
namely,  the  tax  on  real  estate  and  that  on  personal  prop- 
erty. Under  our  peculiar  system  by  which  property  is 
assessed  locally  and  upon  the  basis  of  that  assessment  its 
share  of  the  state  taxes  apportioned  to  each  locality,  there 
is  every  incentive  offered  to  the  local  assessor  to  under- 
value the  land  in  his  jurisdiction,  thereby  escaping  part 
of  the  state  burdens.  This  evil  of  inequality  between  lo- 
calities could  be  obviated  by  the  simple  expedient  of 
exempting  real  estate  from  all  state  taxes  and  leaving  it 
solely  to  the  counties  and  cities  for  purposes  of  taxation. 


Taxation  and  Tariff  237 

In  the  case  of  personal  property  the  great  evil  is  eva- 
sion. Much  of  our  modern  wealth  exists  in  the  form  of 
securities,  stocks,  bonds,  mortgages,  etc.,  and  this  is  prac- 
tically undiscoverable  by  assessors,  except  by  the  volun- 
tary declaration  of  the  tax-payer.  This  is  truthfully 
made  only  by  trustees  and  a  few  conscientious  persons. 
Most  of  our  laws  have  been  directed  to  the  discovery  of 
this  intangible  property  as  it  is  called,  but  without  avail. 
In  a  few  of  the  most  progressive  states  the  effort  has  at 
last  been  recognized  as  futile,  and  the  attempt  is  now  be- 
ing made  to  reach  these  sources  of  income  indirectly,  by 
taxes  on  corporations,  on  business,  franchises,  and  other 
tangible  evidences  of  wealth. 

Inheritance  Taxes 

Not  only  are  corporation,  business,  license,  and  similar 
taxes  being  developed,  but  increasing  resort  is  had  to  in- 
heritance taxes,  over  thirty  states  now  making  use  of  this 
form  of  taxation.  They  usually  fall  more  heavily  on  col- 
lateral than  on  direct  inheritances,  and  in  many  states 
are  progressive  both  as  to  amount  and  as  to  nearness  of 
relationship.  Thus  in  Wisconsin  the  rates  advance  from 
1  per  cent  for  bequests  under  $25,000  to  husband,  wife, 
or  lineal  relation,  to  15  per  cent  for  sums  over  $500,000  to 
very  distant  relatives  or  strangers.  These  various  forms 
of  taxation  are  necessary  to  secure  the  needed  revenues 
for  the  state  governments,  especially  if  these  forego  fur- 
ther resort  to  taxation  of  realty. 

The  tendency  is  now  sufficiently  marked  to  make  it  pos- 
sible to  indicate  with  some  certainty  the  future  of  taxa- 
tion in  this  country.  To  a  certain  extent,  however,  this 
must  be  regarded  as  the  expression  of  an  ideal  rather 
than  the  description  of  an  existing  system.  The  federal 
government  should  have  customs  and  excise  duties,  sup- 


238  Busi>iess  Economics 

plemented  by  an  income  tax.  The  state  governments 
should  have  corporation  and  inheritance  taxes.  The 
cities  and  minor  civil  divisions  should  have  taxes  on 
realty,  with  license  and  franchise  taxes.  Such  a  division 
is  logical  and  avoids  duplication  of  taxation  of  the  same 
source  by  two  or  more  grades  of  government. 

Growth  of  Public  Debts 

Other  problems  connected  with  finance  are  suggested 
in  connection  with  the  universal  tendency  to  increase 
governmental  expenditures  and  public  debts.  The  for- 
mer is  an  expression  of  the  growth  and  expansion  of 
state  functions,  which  will  be  discussed  in  the  next  chap- 
ter. The  latter  is  due  in  part  to  this  same  fact,  in  part 
also  to  the  development  of  credit  and  the  creation  of  a 
market  for  the  sale  of  public  and  other  securities,  and 
finally  to  the  growth  of  constitutional  government,  which 
has  made  the  people  willing  to  entrust  their  capital  to  a 
government  which  they  themselves  as  citizens  really 
control. 

The  Tariff 

The  question  of  tariff  involves  such  important  eco- 
nomic as  well  as  financial  consideration  that  it  seems  best 
to  discuss  this  form  of  taxation  somewhat  more  fully.  It 
has  been  used  not  merely  as  a  means  of  raising  revenue 
but  also  as  an  instrument  to  develop  particular  industries 
and  to  prevent  foreign  competition.  Any  detailed  discus- 
sion of  this  subject  therefore  involves  a  statement  of  the 
pros  and  cons  of  protection  and  free  trade.  It  should  be 
said,  however,  in  advance  that  the  real  issue  is  not  free 
trade,  for  that  is  demanded  by  only  a  few  doctrinaires, 
but  freer  trade  through  intelligent  adjustments  of  the 
tariff.     The  system  of  protection  has  prevailed  in  the 


Taxation  and  Tariff  239 

United  States  for  virtually  one  hundred  years,  and  could 
not  be  suddenly  changed  and  abolished  if  desired.  From 
the  financial  standpoint,  too,  import  duties  are  absolutely 
essential  to  the  support  of  our  federal  government;  the 
question  here  is  not  absolutely  free  trade,  but  the  choice 
of  articles  for  revenue  purposes.  Shall  they  be  those 
which  are  not  produced  in  this  country  or  those  which 
enter  into  competition  with  domestic  products  1  If  finan- 
cial considerations  alone  prevailed,  the  former  would  un- 
doubtedly be  selected  as  the  more  convenient,  certain,  and 
economical.  But  in  the  determination  of  the  tariff  poli- 
cies of  the  United  States  economic  considerations  have 
been  paramount  and  to  an  examination  of  these  we  must 
now  turn. 

AKGUMENTS   FOR   PROTECTION 

Historically  the  following  arguments  have  played  the 
main  role  in  support  of  protection  at  different  times  in 
the  United  States.  The  infant  industries  argument  was 
advanced  by  Hamilton  in  his  celebrated  Report  on  Manu- 
factures in  1791  and  has  always  been  important  until  re- 
cently, when  the  infants  had  grown  to  be  so  lusty  that  evi- 
dently more  valid  reasons  for  protecting  them  must 
be  discovered.  This  was  found  in  the  plea  for  diversified 
production,  which  was  necessary  for  a  well-rounded  eco- 
nomic development;  the  need  of  creating  a  strong  na- 
tional government  and  national  spirit  also  played  its 
part.  In  order  to  win  over  the  farmers  the  home  market 
argument  was  early  urged ;  this  has  taken  various  forms. 
In  the  first  place  it  was  argued  that  the  building  up  of 
manufacturing  centers  and  the  consequent  increase  in 
population  would  give  the  farmers  a  better  market  than 
the  fluctuating  foreign  one.  As  set  forth  by  Carey,  it 
would  keep  within  the  country  the  elements  taken  from  the 


240  Business  Economics 

soil.  It  would  also  save  the  freights  on  the  transportation 
of  goods  back  and  forth  across  the  ocean.  Each  of  these 
arguments  has  lost  force  with  the  development  of  the 
country  and  the  decrease  in  the  cost  of  transportation. 

More  important  today  is  the  wages  argument;  at  first 
protection  was  urged  because  wages  were  high  in  the 
United  States  and  the  manufacturer  needed  to  be  pro- 
tected against  his  foreign  competitor  who  employed 
cheap  labor.  Today  it  is  argued  that  protection  has 
raised  wages  and  must  be  continued  in  order  to  protect 
the  laborer  against  the  pauper  labor  of  Europe.  Curi- 
ously enough,  in  France  protection  is  urged  for  French 
workmen  against  the  highly  paid  and  efficient  American. 
The  effect  of  the  tariff  on  wages  has  been  greatly  exag- 
gerated ;  wages  are  high  in  the  United  States  because  the 
productivity  of  labor  is  high.  Indeed  so  far  as  the  tariff 
raises  prices  it  may  be  argued  that  the  real  wages  of 
labor  are  lowered. 

More  generally  accepted  as  defensible  grounds  for  pro- 
tection are  the  political  arguments  that  a  nation  should 
be  able  to  produce  its  own  military  armaments  and  sup- 
plies, and  that  it  should  be  able  to  use  the  tariff  as  a  re- 
taliatory measure.  Recently  this  latter  has  received  con- 
siderable force  from  the  practice  of  ' '  dumping, ' '  by  which 
is  meant  the  occasional  sale  of  products  abroad  at  prices 
lower  than  those  charged  at  home.  Domestic  manufac- 
turers in  the  country  thus  treated  are  of  course  seriously 
injured  and  have  insisted  upon  protection  against  this 
procedure,  which  has  been  authorized  in  Canada. 

ARGUMENTS    AGAINST    PEOTECTION 

In  answer  to  these  various  arguments  the  free  traders, 
or  those  desiring  a  modification  of  present  high  rates, 
make  their  main  appeal  to  the  doctrine  of  comparative 


Taxation  and  Tariff  241 

costs.  Briefly  stated  this  asserts  that  nations,  like  indi- 
viduals, can  do  some  things  better  than  others.  Like  the 
individual  lawyer  therefore  who  pays  to  have  his  boots 
blacked  while  he  devotes  himself  to  the  law,  the  nation 
should  produce  the  things  it  is  best  fitted  for  and  pay  oth- 
ers to  produce  other  things  which  it  can  do  less  well.  In 
this  way  each  will  obtain  the  largest  possible  return. 
Protection,  which  interferes  with  this  natural  interna- 
tional division  of  labor,  simply  diverts  labor  and  capital 
from  more  profitable  industries.  Practically,  this  purely 
abstract  economic  argument  has  had  little  influence  on 
the  commercial  policy  of  nations,  which  have  been  moved 
more  by  political  and  industrial  considerations.  Today, 
however,  there  is  no  question  but  that  the  freer  movement 
of  capital  and  industry  throughout  the  world  would  be 
advantageous. 

In  answer  to  the  home  market  argument  it  is  pointed 
out  that  with  the  growth  of  large-scale  production  the 
profitable  area  of  manufacture  has  greatly  widened  and 
now  in  many  cases  transcends  national  boundaries.  As 
home  producers  seek  foreign  markets,  which  they  are  be- 
ginning to  do,  they  themselves  will  demand  a  reduction 
of  the  tariff,  especially  in  the  matter  of  raw  materials. 
Free  traders  also  deny  the  need  of  artificially  diversify- 
ing industry  in  a  country  as  large  and  varied  as  the 
United  States,  or  of  building  up  infant  industries.  In- 
deed on  the  latter  point  they  urge  that  many  of  our  trusts 
are  the  result  of  the  tariff,  and  that  the  attempt  to  grant 
legislative  favors  has  resulted  only  in  wholesale  demor- 
alization and  a  debauching  of  our  national  politics. 

Conclusion 

In  conclusion  it  may  be  said  that  under  certain  condi- 
tions the  policy  of  protection  is  relatively  defensible; 


242  Business  Economics 

that  it  has  undoubtedly  hastened  the  industrial  develop- 
ment of  the  United  States,  though  it  has  not  caused  it; 
and  that,  on  the  other  hand,  it  is  responsible  for  not  a 
few  evils  in  our  political  and  industrial  life.  The  strug- 
gle of  particular  interests  during  the  framing  of  the 
Payne  bill  shows  the  impossibility  of  deciding  this  issue 
upon  academic  grounds.  It  may  be  prophesied,  however, 
that  as  our  manufacturers  reach  out  more  seriously  after 
the  foreign  markets,  the  tariff  will  be  modified  so  as  to 
make  this  possible. 

TEST  QUESTIONS 

1.  What  is  John  Fiske's  definition  of  a  tax? 

2.  What  limits  are  there  to  the  power  of  taxation  which  a 
government  possesses? 

3.  What  are  three  maxims  according  to  which  taxes  should 
be  levied? 

4.  Why  should  taxes  be  levied  according  to  the  ability  to  pay  ? 
Illustrate. 

5.  What  three  means  are  usually  used  in  determining  ability 
to  pay? 

6.  What  are  the  arguments  supporting  progressive  taxation? 

7.  What  is  the  distinction  between  direct  and  indirect  taxes? 
Give  an  example  of  each. 

8.  From  what  sources  does  the  federal  government  derive  its 
revenue  ? 

9.  What  are  the  chief  difficulties  with  the  personal  property 
tax? 

10.  What  are  the  leading  characteristics  and  uses  of  the  in- 
heritance tax? 

11.  What  are  the  leading  arguments  for  a  protective  tariff? 

12.  What  are  the  leading  arguments  against  protection? 

13.  What  are  the  chief  points  in  favor  of  an  income  tax  for 
federal  taxation? 


CHAPTER  XVIII 
the  functions  of  government 

The  Pkimary  Functions  of  the  State 

In  the  course  of  the  preceding  pages  we  have  repeat- 
edly referred  to  the  necessity  or  desirability  of  govern- 
mental action,  and  have  emphasized  the  important  part 
which  it  plays  in  our  economic  life  today.  Every  practi- 
cal economic  problem  that  confronts  us  calls  in  some  de- 
gree for  the  exercise  of  state  activity.  It  is  necessary  for 
us  then,  if  we  are  to  render  sound  judgment  on  these  ques- 
tions, to  have  a  clear  opinion  as  to  the  proper  sphere  of 
government  action,  as  to  how  far  the  state  should  inter- 
fere in  the  economic  activities  of  private  individuals. 
We  cannot  do  better  than  to  state  first  the  main  func- 
tions of  a  modern  state. 

The  modern  industrial  system,  as  we  saw  in  the  first 
chapter,  is  based  upon  certain  fundamental  institutions — 
personal  liberty,  competition,  and  private  property.  The 
first  function  of  government  is  to  guarantee  to  every 
individual  the  rights  of  freedom,  property,  and  con- 
tract; this  involves  the  maintenance  of  peace  and  order. 
These  are  often  spoken  of  as  ''natural  rights";  rather 
they  are  rational  rights,  based  upon  expediency  and  hu- 
man welfare  and  created  and  maintained  by  society. 
Without  the  constant  support  and  intervention  of  gov- 
ernment they  would  possess  little  reality  or  significance. 
But  in  addition  to  guaranteeing  these  fundamental  insti- 

243 


244  Business  Economics 

tutions,  modern  governments  grant  individuals  certain 
privileges,  as  patents,  copyrights,  trade-marks,  fran- 
chises, etc.,  designed  to  stimulate  the  economic  activity 
of  individuals. 

The  Regulative  Functions  of  the  State 

A  second  group  of  functions  undertaken  by  the  modern 
state  is  regulative.  As  we  have  seen,  laws  are  made  reg- 
ulating the  freedom  of  contract,  the  conditions  of  labor, 
the  conduct  of  business,  methods  of  banking  and  trans- 
portation, etc.  The  terms  under  which  competitive  busi- 
ness may  be  conducted  are  laid  down,  and  while  freedom 
of  industry  prevails  for  every  indi\ddual  it  is  only  on 
condition  that  he  conforms  to  the  rules  of  the  game  thus 
prescribed.  But  the  conditions  are  not  merely  restric- 
tive ;  sometimes  they  are  designed  to  promote  enterprise, 
as  in  the  case  of  gifts,  subsidies,  protective  duties,  etc. 
In  all  these  ways  the  state  interferes  with  the  action  of 
perfectly  free  competition  for  the  purpose  of  securing 
better  or  more  equitable  conditions. 

The  Economic  Functions  of  the  State 

A  third  group  of  functions  embraces  the  direct  par- 
ticipation in  industry  by  the  government  itself,  as  the 
post-office,  gas,  electric,  waterworks,  canals,  roads, 
sewers,  parks,  etc.  In  other  countries,  where  the  functions 
of  government  are  more  extended  than  in  the  United 
States,  it  conducts  railroads,  telegraph  and  telephone  sys- 
tems, tenements,  pawnshops,  theaters,  industrial  insur- 
ance, and  various  other  activities.  The  line  which  di- 
vides public  from  private  enterprise  varies  greatly  in 
different  countries. 


Functions  of  Government  245 

Limits  of  State  Action 

This  raises  the  general  question:  How  far  is  it  desir- 
able that  the  economic  functions  of  government  should 
extend?  As  to  the  necessity  of  state  activity  in  some 
form  there  can  be  no  doubt.  Production,  exchange,  dis- 
tribution, and,  to  a  smaller  extent,  consumption  are  all 
social  processes;  they  concern  the  whole  of  society  and 
must  be  brought  under  social  control.  In  the  middle  of 
the  eighteenth  century  Montesquieu  laid  down  the  prop- 
osition that  taxes  invariably  increase  with  the  growth 
of  liberty.  Historically  this  has  been  verified.  The  de- 
velopment of  freedom  in  government  and  industry  has 
meant  the  realization  of  self-restraint  by  the  imposition 
of  regulative  law.  But  the  modern  state  has  gone  fur- 
ther than  this.  It  has  realized  the  necessity  of  taking 
an  active  part  in  modern  industrial  life,  for  the  equaliza- 
tion of  the  terms  of  competition,  the  redress  of  griev- 
ances and  the  furnishing  of  utilities,  either  because  it 
could  do  it  better  or  because  it  was  the  only  agency  capa- 
ble of  acting. 

The  standpoint  of  this  treatise  has  been  one  of  mod- 
erate individualism,  believing  in  free  competition  and  in- 
dividual initiative,  but  not  frightened  off  by  the  bogey  of 
socialism,  if  at  any  point  the  interference  of  government 
seemed  desirable  or  necessary.  To  present  the  matter 
clearly  it  will  be  well  to  state  briefly  the  main  theories 
that  have  been  held  as  to  the  proper  function  of  govern- 
ment, arranging  them  in  their  logical,  though  not  in  their 
historical,  order. 

Anarchism 

At  one  extreme  stands  anarchism,  which  must  be 
thought  of  not  as  anarchy  and  riot,  but  as  a  philosophi- 


246  Business  Economics 

cal  theory  of  society.  Scientific  anarchism  contemplates 
an  ideal  state  of  perfect  freedom,  in  which  ihe  state,  the 
coercive  exercise  of  authority  by  man  over  man,  would 
not  exist.  According  to  this  theory  only  the  individual 
has  rights;  there  is  no  more  divinity  of  right  in  a  ma- 
jority than  there  is  in  kings.  Government  is  an  invasion 
of  the  right  of  the  indi^ddual  to  do  as  he  pleases,  and 
should  be  abolished;  with  its  abolition  would  vanish  the 
various  moral,  social,  and  industrial  evils  to  which  it  has 
given  rise,  and  human  society  would  develop  on  a  higher 
plane.  Stated  in  its  extreme  form  anarchism  is  evidently 
too  ideal  for  frail  human  nature  as  at  present  constituted. 

Extreme  Individualism 

Of  more  practical  importance  has  been  the  theory  of 
extreme  individualism  as  set  forth  by  Herbert  Spencer — 
a  view  designated  by  Huxley  as  the  night-watchman 
theory  of  the  state.  According  to  this  the  functions  of 
government  should  be  limited  to  the  protection  of  life  and 
property  and  the  enforcement  of  contracts,  but  should 
not  include  such  things  as  education,  regulation  of  indus- 
try, local  improvements,  charities,  coinage,  etc.  Private 
initiative  and  competition  are  trusted  to  supply  these 
things,  while  the  economic  harmony  of  the  interests  of 
each  individual  with  those  of  society  will  prevent  any 
wrong  from  being  done.  The  keynote  of  the  whole  theory 
lies  in  the  view  that  government  is  an  evil,  though  a  nec- 
essary one,  and  should  consequently  be  restricted.  Adam 
Smith's  system  of  natural  liberty  went  somewhat  fur- 
ther, as  it  added  to  the  three  functions  named  above, 
the  construction  of  public  works  and  buildings,  etc. ;  but 
it  excluded  such  activities  as  education  and  the  ci\dl 
courts,  which  we  regard  as  most  suited  to  government 
management.    This  theory  had  its  origin  in  the  reaction 


Functions  of  Government  247 

against  the  undue  interference  with  industry  by  the  gov- 
ernment under  mercantilism  and  had  thus  a  historic  jus- 
tification and  value. 

Modified  Individualism 

The  theory  most  generally  held  by  economists  and 
writers  in  the  United  States  is  probably  the  modified  in- 
dividualism set  forth  by  John  Stuart  Mill.  According  to 
him,  freedom  of  industry  ''should  be  the  general  prac- 
tice; every  departure  from  it,  unless  required  by  some 
great  good,  is  a  certain  evil."  Industry,  he  said,  should 
be  left  to  individuals  and  the  government  should  never 
interfere  unless  there  is  an  antagonism  between  social 
and  private  interests.  Individuals  following  their  own 
interests  will  always  conduct  business  better  than  the 
government,  which  is  inefficient,  corrupt,  and  can  fall 
back  on  taxation  to  cover  its  mistakes.  Individualism 
should  therefore  be  the  rule  and  governmental  action 
should  be  the  exception.  But  Mill  himself  admitted  that 
there  was  no  theoretical  limit  to  the  extension  of  govern- 
mental functions,  and  in  so  doing  is  said  to  have  opened 
the  door  to  socialism.  Nevertheless  the  basic  idea  is 
still  that  government  is  an  evil  and  an  extension  of  its 
activities  is  on  the  whole  undesirable. 

The  Cultuee  State  Theory 

Opposed  to  this  view  is  the  culture  state  theory,  enun- 
ciated by  Roscher  and  very  generally  held  in  Germany, 
which  regards  the  state  as  a  beneficent,  positive,  and  con- 
structive force  in  our  industrial  life.  The  advocates  of 
this  theory  point  out  that  the  functions  of  the  government 
change  with  progress,  and  that  in  our  complex  modern  in- 
dustrial life  it  should  seek  to  improve  conditions  posi- 
tively and  not  leave  the  people  to  the  mercies  of  a  blind 


248  Business  Economics 

competitive  struggle;  practically,  it  should  regulate  in- 
dustry, conditions  of  work,  housing,  etc.,  and  should  man- 
age all  public  utilities  which  affect  the  life  or  well-being 
of  the  citizens,  as  railroads,  telegraphs,  industrial  insur- 
ance, etc. 

Still  further  in  the  same  direction  goes  the  view  known 
as  state  socialism,  of  which  the  best-known  advocate  is 
Professor  Adolph  Wagner.  This  advocates  individual- 
ism, but  insists  that  it  is  responsible  for  many  injustices 
and  evils,  which  it  is  consequently  the  duty  of  the  state  to 
redress.  For  instance  the  state  should  correct  the  in- 
equalities of  wealth  brought  about  by  the  distribution  of 
the  social  income  under  the  present  competitive  system ; 
this  should  be  done  by  the  progressive  taxation  of  inherit- 
ances and  incomes,  the  limitation  of  inheritance  and  be- 
quest, the  government  ownership  of  public  utilities,  as 
railroads,  telegraphs,  telephones,  coal  mines,  etc. 

This  theory  stops  just  short  of  socialism,  but  enlarges 
the  functions  of  the  state  to  the  largest  degree  compatible 
with  individualism.  Beyond  this,  and  at  the  farthest  ex- 
treme from  anarchism,  stands  socialism,  which,  however, 
demands  a  more  careful  examination  than  the  other 
views  have  received,  because  of  its  present  prominence. 

SOCIAUSM 

Socialism  may  be  briefly  defined  in  the  words  of  Pro- 
fessor Ely  ^  as  *Hhat  contemplated  system  of  industrial 
society  which  proposes  the  abolition  of  private  property 
in  the  great  material  instruments  of  production,  and  the 
substitution  therefor  of  collective  property;  and  advo- 
cates the  collective  management  of  production,  together 
with  the  distribution  of  social  income  by  society,  and  pri- 

1  Socialism  and  Social  Reform,  p.  19. 


Functions  of  Government  249 

vate  property  in  the  larger  proportion  of  this  social  in- 
come."  Four  features  are  involved  in  this  definition, 
namely,  (1)  common  ownership,  (2)  production,  (3)  dis- 
tribution, and  (4)  private  incomes. 

The  cardinal  and  distinctive  element  in  socialism  is 
the  collective  or  social  ownership  of  the  means  of  produc- 
tion, that  is,  of  the  land  and  capital.  Instead  of  being 
owned  privately  as  today,  they  would  be  owned  by  the 
people  as  a  whole,  by  the  state,  and  used  by  it  for 
production.  Socialists  do  not  oppose  capital,  as  is  often 
said,  but  only  the  private  ownership  of  capital.  But 
under  such  a  system  private  business  as  we  know  it  to- 
day, individual  enterprise  for  the  sake  of  profit,  could  not 
exist.  It  is  often  urged  that  socialism  means  a  '^  grand 
divide, ' '  and  that  in  such  an  event  the  shrewder  and  more 
thrifty  would  shortly  have  the  wealth  of  the  idle  or  stupid 
members  of  society.  But  just  that  is  guarded  against 
under  socialism,  for  there  would  be  no  private  ownership 
of  capital,  and  hence  no  one  could  get  his  neighbor's 
share;  it  would  all  be  held  under  collective  ownership. 
With  the  abolition  of  private  capital,  there  would  disap- 
pear of  course  all  the  economic  institutions  that  have 
grown  up  around  it,  as  credit,  banking,  lease,  hire,  the 
stock  and  produce  exchanges,  etc. 

COLLECTIVE  MANAGEMENT  OF  PRODUCTION 

Socialism  also  means  the  collective  or  social  organiza- 
tion and  management  of  industry.  Socialists  criticize 
severely  our  present  methods  of  production,  which  they 
call  planless  and  wasteful.  They  point  to  the  constant  re- 
currence of  crises  as  an  evidence  of  mistakes  of  the  com- 
petitive system,  which  they  say  could  be  obviated  under  a 
well-organized  comprehensive  scheme.  They  also  urge 
the  wastes  of  modern  capitalism  in  the  duplication  of 


250  Business  Economics 

plants,  advertising  (which  amounts  to  more  than  $500,- 
000,000  a  year  in  the  United  States),  traveling  salesmen, 
multiplication  of  small  stores,  etc.  Finally,  an  artificial 
disharmony  between  the  interests  of  society  and  private 
individuals  is  promoted  by  our  system  of  private  prop- 
erty and  profit.  A  coal  trust  limits  the  supply,  farmers 
rejoice  over  small  crops,  and  planters  used  to  burn  part 
of  their  cotton,  in  short  the  bounty  of  nature  is  regarded 
as  a  calamity. 

Some  truth  may  be  admitted  in  these  criticisms,  but 
in  answer  it  may  be  said  that  some  of  them  are  being 
corrected  under  individualism,  while  as  to  those  that 
remain  the  remedy  offered  is  worse  than  the  disease. 
The  first  and  fundamental  question  is  the  effect  of  social- 
ism on  the  amount  produced,  for,  as  we  have  seen,  any 
diminution  would  mean  a  worse  economic  condition  of 
society,  even  though  it  were  offset  by  a  more  equal  dis- 
tribution. Under  individualism  the  appeal  to  industry 
and  thrift  is  the  self-interest  of  the  individual,  and  under 
the  stimulus  of  this  motive  the  production  of  wealth  has 
been  increased  enormously.  It  is  doubtful  whether  the 
motives  of  altruism,  desire  for  social  approbation,  and 
similar  ones  suggested  by  the  socialists  would  promote 
industrial  activity  as  efficiently  as  the  individualistic  de- 
sire for  pecuniary  gain. 

DIFFICITLTIES  OF  COLLECTIVE  MANAGEMENT 

Moreover  the  difficulties  of  organizing  and  managing 
all  industries  would  be  enormous.  According  to  the  so- 
cialist plan,  statistics  of  consumption  would  be  gathered 
in  advance,  the  idle  changes  of  fashion  would  of  course 
disappear,  and  production  could  be  accurately  calculated. 
But  aside  from  the  problem  of  securing  an  honest  and  ef- 
ficient administration,  the  work  of  organizing  industry 


Fimctions  of  Government  251 

from  a  centralized  bureau  would  probably  prove  insur- 
mountable. The  distribution  of  the  labor  force  among 
various  employments  suggests  another  difficulty.  Under 
individualism  the  necessary  distribution  takes  place 
through  the  agency  of  wage  pajments  and  the  choice  of 
an  occupation  is  left  free  to  the  individual.  As  the  wage 
system  would  disappear  with  the  abolition  of  private 
capital,  some  other  means  would  have  to  be  devised,  as 
allotment  by  the  government.  But  more  important 
would  be  the  selection  of  the  managers  of  industry ;  com- 
petition provides  a  process  whereby  the  inefficient  are 
eliminated  and  the  able  put  in  charge.  As  socialism 
would  be  an  industrial  democracy  the  selection  of  the 
captains  of  industry  under  that  system  would  probably 
be  made  by  election.  Is  it  likely  that  the  voters  would 
place  over  themselves  the  ablest,  that  is  the  strictest, 
most  economical,  and  most  energetic  man?  Taking  men 
as  we  find  them  today,  this  may  well  be  doubted. 

SOCIALISM   AS   A    SCHEME    OF    DISTRIBUTION 

But  it  is  as  a  scheme  of  distribution  that  socialism  has 
been  most  warmly  urged.  The  inequalities  and  injus- 
tices of  present  methods  are  pointed  out  and  a  more  just 
system  demanded.  Socialists  themselves,  however,  are  not 
agreed  as  to  what  constitutes  justice.  Needs  and  merits 
have  both  been  urged  as  bases  of  distribution,  but  they 
suffer  from  vagueness  and  difficulty  in  administration; 
most  socialists  today  agree  that  equality  of  income  would 
best  meet  the  requirements  of  justice.  They  claim  that 
talented  persons  have  been  endowed  by  nature  with  their 
abilities  and  should  use  them  as  a  trust  for  society  and 
not  expect  greater  rewards  than  their  less  talented  broth- 
ers. To  this  individualists  answer  that  the  practical 
question  is  how  to  secure  the  greatest  exercise  of  these 


252  Business  Economics 

gifts,  and  that  is  now  done  by  appealing  to  the  motive  of 
self-interest.  Some  writers  go  even  further  and  assert 
that  the  desire  for  inequalitj^  is  the  chief  stimulus  to  in- 
vention and  enterprise. 

A  crucial  point  in  every  socialistic  scheme  is  the  deter- 
mination of  value  under  such  a  system;  most  socialists 
follow  Marx  and  say  that  this  should  be  determined  by 
the  *' socially  necessary  labor  time"  required  for  the  pro- 
duction of  an  article.  Such  a  measure  leaves  out  of  ac- 
count entirely  the  aspect  of  utility  or  demand,  and  would 
clearly  be  inadequate.  Prices  would  be  fixed  by  the  state 
and  calculated  in  labor  time — most  probably  represented 
by  labor  checks,  which  would  constitute  the  medium  of 
exchange  in  the  socialistic  society. 

SOCIALISM    PERMITS    PRIVATE   INCOMES 

Finally,  in  the  definition  given  above,  it  was  stated 
that  private  property  would  exist  in  the  larger  propor- 
tion of  the  social  income  after  it  was  divided.  There  is 
no  reason  why  this  should  not  be  true,  for,  though  private 
capital  would  be  abolished,  the  state  would  not  interfere 
with  the  individual  in  the  use  of  his  income  after  it  was 
earned.  If  one  man  preferred  fine  clothes  and  another 
pictures  and  books,  it  would  be  possible  for  the  latter  per- 
son to  accumulate  such  articles  of  enjojTnent  or  consump- 
tion. He  could  even  have  tools  for  private  carpentering 
or  a  horse  for  riding,  but  under  no  circumstances  would 
he  be  permitted  to  use  these  for  production  or  as  instru- 
ments of  private  gain.  Socialism  must  stand  or  fall  as  a 
system  of  production  and  distribution ;  it  is  not  necessary 
to  criticise  minor  points.  On  these  broad  grounds  it  must 
be  rejected,  although  it  may  fairly  be  admitted  that  so- 
cialists have  often  proved  themselves  keen  and  useful 
critics  of  existing  institutions. 


Functions  of  Government  253 

The  Single  Tax 

Many  persons  in  this  and  other  countries,  who  do  not 
approve  of  socialism,  nevertheless  believe  in  the  exten- 
sion of  state  ownership  or  activity  along  particular  lines. 
Thus  Henry  George,  though  in  other  respects  an  individ- 
ualist, did  not  believe  in  the  private  ownership  of  land. 
Land  is  limited  in  quantity  and  yields,  because  of  its 
monopoly  character,  an  ''unearned  increment"  or  rent, 
quite  apart  from  the  return  due  the  owner  for  improve- 
ments. He  proposed  that  the  government  should  confis- 
cate this  unearned  increment  by  levying  a  single  tax 
on  all  land  equal  to  it.  He  thought  that  this  would  pro- 
vide revenue  sufificient  for  all  government  needs  without 
resorting  to  other  forms  of  taxation;  in  this  he  was  un- 
doubtedly mistaken,  but  the  main  interest  in  the  scheme 
for  us  is  economic,  and  not  financial.  The  reason  for  the 
scheme  was  that  land,  being  a  limited  monopoly,  would 
be  increasingly  in  demand  as  society  progressed,  and  that 
consequently  the  landlords  would  absorb  in  their  in- 
creased rents  most  of  the  enlarged  production  of  the  fu- 
ture. This  assumes  that  rents  always  increase  and  never 
decrease,  which  is  historically  untrue.  Nor  does  the 
growth  and  progress  of  society  necessarily  increase  the 
demand  for  land ;  it  may  be  directed  to  other  things,  while 
improvements  in  the  art  of  agriculture  may  actually  de- 
crease this  demand.  We  must,  however,  admit  that  there 
are  many  instances  of  unearned  increments,  not  only  in 
the  case  of  ground  rents,  but  also  of  monopoly  profits 
from  various  sources;  these  might  very  properly  be  se- 
cured to  society  by  means  of  special  and  heavy  taxes. 

Public  Owtstership 

The  nationalization  of  the  railroads  and  telegraph  and 
the  municipalization  of  local  public  utilities  have  been 


254  Business  Economics 

advocated  by  many  persons  who  are  not  socialists,  ex- 
cept in  so  far  as  they  desire  an  extension  of  governmental 
activity  along  these  lines.  They  urge  this  because  the 
utilities  in  question — gas,  water,  electricity,  telephone, 
street  railways,  etc. — are  by  their  very  nature  monopo- 
lies, and  because  under  private  control  they  are  often  in- 
efficiently or  dishonestly  managed.  A  less  drastic  rem- 
edy for  these  abuses  might  of  course  be  found  in  regula- 
tion. Unrestricted  private  control  of  municipal  monopo- 
lies is  advocated  by  few;  the  real  issue  is  between  public 
regulation  and  public  management.  And  this  issue  will 
depend  in  the  last  analysis  upon  the  question  as  to  which 
can  give  the  best  results  to  society. 

TEST  QUESTIONS 

1.  What  are  the  primary  functions  of  a  state? 

2.  How  do  the  regulative  functions  of  a  state  differ  from  the 
primary?    Give  some  examples  of  the  regulative  functions. 

3.  What  is  meant  by  the  economic  functions  of  the  state? 
Mention  some  of  them. 

4.  What  is  the  theory  of  anarchism?     What  does  it  hope  to 
accomplish  ? 

5.  What  is  meant  by  the  theory  of  individualism? 

6.  What  political  doctrines  of  today  may  be  considered  a  part 
of  the  individualistic  school?     Name  some  of  them. 

7.  What  is  meant  by  the  culture  state  theory  ? 

8.  What  is  meant  by  socialism? 

9.  What  are  four  features  involved  in  socialism? 

10.  Enumerate  the  socialists'  criticisms  of  our  present  system 
of  industrial  organization. 

11.  Does  socialism  permit  private  incomes?     Explain. 

12.  Give  the  essentials  of  the  single  tax  theory. 

13.  To  what  extent  has  public  ownership  advanced  in  indus- 
trial affairs? 

14.  What  factors  ultimately  determine  the  kind  of  industrial 
organization  that  is  to  prevail? 


CHAPTER  XIX 
economic  progress 

Pbogkess  in  the  Field  of  Labob 

At  the  conclusion  of  a  study  of  this  character  we' are 
inevitably  led  to  summarize  our  deductions  and  to  try 
to  answer  the  question  as  to  what  the  lessons  of  the  past 
have  taught  us.  In  what  direction  are  the  forces  of  eco- 
nomic life  taking  us?  The  conclusion  of  this  book  is  that 
they  are  making  for  economic  progress,  and  it  will  be 
worth  while  to  justify  as  far  as  possible  this  belief.  It 
is,  however,  impossible  to  do  this  except  in  very  general 
terms,  for  definite  data  for  measuring  this  improvement 
do  not  exist,  and  economic  progress  itself  is  a  somewhat 
vague  conception. 

Even  such  comparatively  simple  facts  as  the  rate  of 
wages  or  the  hours  of  labor  can  be  stated  only  very  gen- 
erally. But  both  of  these  show  a  decided  improvement 
in  the  condition  of  the  working  class.  A  careful  investi- 
gation for  Great  Britain  by  Mr.  A.  L.  Bowley  ^  shows 
that  if  wages  for  the  decade  1890-1900  be  represented  as 
100,  then  the  course  of  wages  during  the  nineteenth  cen- 
tury would  have  run  somewhat  as  follows : 

1  Wages  in  the  United  Kingdom  in  the  Nineteenth  Century. 

255 


256 


Business  Economics 


Decade 

Relative 
Wages 

Decade 

Rhlativk 
Wages 

1800-10 

55-65 

1850-60 

65 

1810-20 

65-70 

1860-70 

75 

1820-30 

65 

1870-80 

95 

1830-40 

60 

1880-90 

90 

1840-50 

60 

1890-1900 

100 

Without  investigating  the  vaUdity  of  the  figures  too 
closely,  it  may  safely  be  affirmed  that  the  movement  of 
wages  has  been  distinctly  upward  and  that  the  rise  was 
certainly  not  less  than  50  per  cent.  For  the  United  States 
the  increase  has  not  been  so  great,  probably  because 
wages  started  at  a  higher  level.  According  to  the  Aldrich 
report,  if  wages  and  prices  in  1860  in  the  United  States 
be  taken  as  100,  relative  wages  in  1840  were  82.5  and 
relative  prices  98.5;  in  1880  they  were  respectively  143 
and  103.4;  in  1903  they  were  187  and  103.  That  is  to  say, 
relative  wages  showed  a  marked  advance  and  real  wages, 
owing  to  the  fact  that  general  prices  remained  almost 
stationary,  an  even  greater  improvement.  So,  too,  the 
hours  of  labor  appear  to  have  been  shortened  in  Great 
Britain  about  two  hours  a  day  (from  ten  to  fourteen 
hours  to  from  eight  to  twelve),  and  in  the  United  States 
probably  as  much,  the  average  length  of  the  working  day 
in  certain  employments  decreasing  from  10.3  hours  in 
1880  to  9.6  hours  in  1903. 


Progeess  in  Production 

In  the  field  of  production  the  most  dramatic  and  strik- 
ing advances  have  been  achieved.  The  application  of 
steam  and  more  recently  of  electricity  as  the  motive 
power  for  the  newly  invented  and  constantly  improved 


Economic  Progress  257 

machinery  has  permitted  an  enormous  expansion  of  pro- 
duction. This  has  been  made  still  greater  by  the  opening 
up  of  new  mines  and  new  lands  and  improvements  in  the 
machinery  of  transportation  and  exchange  and  in  the  or- 
ganization of  business.  Especially  in  the  United  States, 
where  the  natural  resources  were  unusually  rich  and  the 
people  energetic  and  ingenious,  has  the  growth  of  wealth 
been  marvelous.  And  yet  almost  a  century  after  the  be- 
ginning of  the  Industrial  Revolution  in  England,  Mill 
alleged  that  labor-saving  inventions  had  not  lightened 
the  toil  of  any  human  being;  they  had  only  enabled  a 
greater  number  to  live  the  same  life  of  drudgery  and  im- 
prisonment. What  answer  can  we  make  to  this  indict- 
ment today?  Why  is  it  that  the  working  class  still  has 
so  little  of  this  vast  increase  of  wealth  and  still  lives  so 
close  to  the  border  line  of  poverty? 

PkOBLEMS    in    DiSTRIBUTIOlSr 

To  answer  this  question  thoroughly  would  require  an 
analysis  of  the  subject  of  distribution,  but  a  few  reasons 
may  be  briefly  suggested.^  While  the  social  income  has 
been  greatly  increased  by  these  improvements  the 
amount  paid  in  rent  to  owners  of  land,  water  powers,  etc., 
has  also  grown.  If  we  approve  of  private  property  in 
land  as  best  adapted  to  stimulate  its  use  for  society,  then 
we  must  admit  the  justice  of  rent  and  of  its  payment  to 
present  landowners.  Similarly,  too,  the  payment  of  in- 
terest to  the  o^vners  of  capital  has  absorbed  a  large  part 
of  the  increased  income  of  society,  though  the  proportion 
going  to  this  factor  is  probably  growing  smaller  because 
of  the  fall  in  the  rate  of  interest. 

2  Acknowledgment  should  be  made  at  this  point  of  indebtedness  to  the 
excellent  final  chapter  in  Prof.  Seager's  Introduction  to  Economics. 


258  Business  Economics 

But  as  we  have  seen,  modern  industry  is  essentially 
capitalistic,  that  is,  it  depends  upon  the  use  of  capital  for 
its  operations.  Since  we  allow  private  property  in  cap- 
ital and  believe  that  to  be  the  best  method  yet  devised 
for  securing  its  accumulation,  we  must  justify  interest. 
Profits  in  general  are  fairly  earned  by  industrial  or- 
ganizers and  others  who  manage  our  businesses  and  are 
necessary  to  enlist  their  services.  Probably  in  most 
cases  society  does  not  overpay  these  leaders  of  indus- 
try. But  some  forms  of  profit,  such  as  those  derived 
solely  from  monopoly,  especially  from  the  monopoly  of 
limited  natural  resources,  are  both  too  large  and  socially 
unearned.  Clearly  these  should  be  controlled  and  ab- 
sorbed by  society. 

Distribution  of  the  Social  Income 

One  reason  then  why  labor  has  not  profited  more  by 
the  great  increase  in  wealth  is  that  the  other  factors  in 
production  have  laid  claim  to  their  shares  also.  There 
is  good  reason  for  believing,  however,  that  the  share  of 
labor  has  been  steadily  growing  greater  all  the  time,  and 
that  today  it  gets  a  larger  proportion  of  the  social  income 
than  ever  before.  This  fact  is  obscured  by  the  great 
growth  in  population,  which  has  more  than  doubled  in 
the  last  hundred  years  in  Europe  and  has  shown  a  twen- 
tyfold  increase  in  the  United  States.  The  larger  income 
is  divided  among  more  people,  and  though  each  today 
gets  more  than  his  grandfather,  there  is  not  yet  enough 
produced  to  make  all  rich.  Indeed  if  the  wealth  of  the 
United  States  were  divided  equally,  it  would  not  provide 
a  competence  for  anybody.  The  difficulty  is  not  merely 
that  there  is  inequality  in  distribution,  but  that  the  need 
of  a  much  greater  production  of  wealth  must  also  be  met. 
Inequalities  may  be  adjusted  by  such  measures  as  pro- 


Economic  Progress  259 

gressive  inheritance  taxes,  but  resort  to  this  or  similar 
methods  must  not  be  so  severe  as  to  weaken  the  motives 
for  the  accumulation  of  capital.  This  must  form  one  of 
the  strongest  reasons  for  rejecting  the  drastic  proposals 
of  socialism. 

Increased  Command  over  Comforts 

Improvements  in  production  have,  however,  not 
merely  increased  the  total  output;  they  have  greatly  re- 
duced the  cost  of  many  articles  and  have  brought  within 
the  reach  of  the  poorest  consumers  others  which  a  cen- 
tury ago  would  have  been  unattainable.  Improvements 
in  transportation  have  served  to  bring  an  ever-increasing 
variety  of  products  to  market.  The  material  progress  of 
a  people  can  be  gaged  fairly  well  by  their  consumption  of 
certain  semi-luxuries,  such  as  tea,  coffee,  sugar,  tobacco, 
beer,  etc.;  these  show  a  steady  increase  during  the  past 
century. 

Thus  in  the  United  States  between  1871  and  1903  inclusive, 
the  per  capita  consumption  of  coffee  increased  from  7.91  to 
10.79  pounds,  that  of  sugar  from  36.2  pounds  to  71.1  pounds, 
that  of  malt  liquors  from  6.1  gallons  to  18.04  gallons,  that  of 
wheat  and  flour  from  4.69  bushels  to  5.81  bushels.^ 

A  similar  investigation  for  Great  Britain  shows  an 
average  increase  of  40  per  cent  in  a  considerably  larger 
list  of  the  same  character  between  1860-64  and  1895-96.  It 
must  be  admitted  that  there  is  much  lack  of  economy  in 
present  consumption;  there  is  often  wasteful  and  posi- 
tively injurious  consumption,  an  illustration  of  which 
would  be  found  by  many  persons  in  the  increased  con- 
sumption of  malt  liquors  cited  above.     From  a  purely 

3  Adams  and  Sumner,  Labor  Problems,  p.  523. 


260  Business  Economics 

economic  standpoint  the  enormous  waste  of  war  and  the 
burdensome  cost  of  military  and  naval  armament  must 
also  be  condemned. 

The  Fxjttjke 

The  task  of  prophecy  is  usually  a  fruitless  one,  but  at 
least  it  is  now  possible  for  us  to  indicate  some  of  the  lines 
along  which  reform  is  needed  and  the  goal  towards  which 
the  future  of  economic  progress  will  probably  move. 
The  natural  resources  of  the  nation  must  be  more  care- 
fully conserved  and  reckless  destruction  prevented;  at 
the  same  time  the  monopolization  of  limited  resources  by 
private  individuals  or  corporations  must  be  rigidly  re- 
stricted. The  growth  of  trusts  seems  but  the  last  step 
in  a  steady  growth  in  size  of  the  business  unit  and  may  be 
accepted  as  an  economical  method  of  industrial  organiza- 
tion, but  the  evils  of  corporate  financial  management 
must  be  carefully  guarded  against. 

The  growth  of  labor  organizations,  on  the  other  hand, 
must  be  admitted  to  be  equally  logical  and  desirable. 
While  they  often  display  monopolistic  tendencies,  yet 
our  main  reliance  must  be  placed  upon  these  agencies  to 
secure  bargains  for  laborers  on  terms  of  equality  with 
their  employers.  But  on  behalf  of  wage-earners  not  eas- 
ily organized  we  must  resort  to  state  intervention  by 
means  of  factory  and  labor  legislation  in  order  to  secure 
equitable  labor  contracts.  Free  competition  which  ex- 
poses women  and  children  to  the  greed  of  unscrupulous 
employers  is  defended  by  no  one  today,  and  it  is  clearly 
recognized  that  legislation  along  these  lines  must  be  fur- 
ther extended,  as  for  instance  in  the  direction  of  indus- 
trial insurance,  old-age  pensions,  adequate  care  for  the 
unemployable,  etc. 


Economic  Progress  261 

Improvements  in  our  banking  and  currency  system, 
an  extension  of  banking  facilities  to  the  farming  and  ar- 
tisan classes,  the  more  careful  regulation  of  railroad 
rates  and  reforms  in  methods  of  taxation — all  are  called 
for  by  the  development  and  readjustment  of  industry. 
On  the  other  hand,  much  remains  to  be  done  in  the  educa- 
tion of  the  mass  of  the  people  to  habits  of  rational  living 
and  enjoyment.  In  the  great  cities  housing  conditions 
should  be  effectively  regulated,  sweat  shops  suppressed, 
intemperance  discouraged,  and  where  possible  a  love  of 
art  and  outdoor  life  promoted.  A  more  rational  use  of 
income  would  increase  considerably  the  material  well- 
being  of  the  people. 

Problems  of  distribution  are  still  more  insistent.  No 
one  who  has  the  welfare  of  the  laboring  classes  or  of  our 
democratic  society  at  heart  can  view  with  approval  the 
existence  of  widely  separated  classes,  with  dispropor- 
tionate political  and  economic  power.  Greater  equality 
in  fortunes — a  leveling  up  of  incomes — must  certainly 
be  regarded  as  a  sound  social  ideal.  On  the  other  hand, 
we  have  seen  reason  to  reject  the  drastic  remedies  of 
socialism  as  a  cure  for  the  injustices  of  present  methods 
of  distribution  or  production.  Improvement  must  come 
by  conservative  reform  along  the  lines  of  our  past  de- 
velopment. In  the  last  analysis  all  attempts  to  improve 
conditions  permanently  depend  upon  the  character  and 
capacity  of  the  individual.  Because  of  this  fact  educa- 
tion assumes  great  importance — education  not  merely 
in  the  art  of  production  but  also  in  that  supreme  art,  the 
art  of  living. 


262  Business  Economics 

TEST  QUESTIONS 

1.  What  improvement  has  been  made  since  1800  in  the  con- 
dition of  the  working  class  in  the  United  States? 

2.  Along  what  lines  has  the  progress  in  labor  affairs  taken 
place  ? 

3.  What  progress  has  been  made  in  the  field  of  production? 
To  what  factors  has  this  been  due? 

4.  Has  labor  received  its  fair  share  of  the  benefits  due  to 
improved  production? 

5.  Why  has  the  institution  of  private  property  been  continued 
in  modern  industrial  society? 

6.  Why  has  society  seen  fit  to  place  checks  upon  monopoly  ? 

7.  From  the  economic  standpoint  are  military  and  war  ex- 
penses justifiable  ? 

8.  What  is  the  probable  future  tendency  of  development  in 
corporate  organizations?    In  labor  organizations? 

9.  In  the  last  analysis  what  factors  determine  true  economic 
progress  ? 


INDEX 


Accident:  Insurance,  141,  144;  liability 
for,    143 ;    Prevention    Bureau,    141 
industrial,  135,  140,  145,  147. 

Accidents  :  causes  of,  in  German  indus- 
tries, 142  ;  fatal,  140 ;  statistics  of 
142. 

Act,  tbe  English  Employers  and  Work 
men,  100. 

Act,  Peel's,  127. 

Acts :  anti-truck,  07 ;  compensation 
144  ;   factory,  127. 

Administration,  business,  schools  of, 
158. 

Agencies,   employment,   free,    139. 

Agricultural :  colleges,  11,  20  ;  Depart 
ment,  20 ;  Implements,  60 ;  labor,  90 
110;  resources,  10,  48;  schools,  159 

Agriculture,  importance  of,  18. 

Alabama,  34,  36. 

Alaska,  value  of  fisheries  in,  26. 

Aldrich  report,  256. 

American  express  companies,  62. 

American  Federation  of  Labor,  103, 
104,   165. 

American   Merchant   Marine,    194-196. 

American  Steel  and  Wire  Company, 
savings  of  cross-freights,  68. 

Anarchism,  200.  245,  246,  248. 

Annuity,  163. 

Anthracite  Coal  Commission,  115. 

Anti-trust  laws,  77.   188. 

Appalachian  coal  field,  34. 

Apprentices :  early  economic  position. 
93  ;  limitation  of  number,  106 ;  pau- 
per,  127. 

Apprenticeship,  96,  156. 

Arbitration  of  labor  disputes,  114,  115. 

Arizona,  copper  production  in,  39. 

Assessment  of  taxes,  236. 

Asset  currency,  185. 

Associations  :  building  and  loan,  171  ; 
credit,    172. 

Assumption   of  risk,   143. 

Australia,  compulsory  arbitration  in, 
115. 

Austria,   industrial  accidents   in,   142. 

Average  earnings  of  men,  120. 

Baltimore,  oyster-canning  in,  52. 
Banking,  new  system  of.  184. 
Bank-notes :    as   credit,    183 ;    national, 

181. 
Banking  trust,  06. 
Banks,   regionnl   reserve,   185. 
Bargain  theory  of  labor,  208. 


Bargaining,  collective,  102,  104.  107, 
111,   113,   115,  122,  130. 

Bargaining  power,  labor'.s,  98. 

Barter,  industrial  stage  of,   176. 

Beef  trust,   70. 

Beer,  consumption  of,  259. 

Benefit  theory  of  taxes,  233. 

Benefits,  fraternal,  of  labor  unions, 
112. 

Bills   of   credit,    178. 

Bimetallism,   178-180. 

Birth-rate,  220. 

Blaine,  James  G.,  on  free  trade  and 
protection,  48. 

Blast  furnaces,  36. 

Board  :  Federal  Reserve,  185  ;  of  arbi- 
tration,  115. 

Boards  of  conciliation,  115. 

Bogart,  E.  L.  :  Economic  Historu  of  the 
United  States.  77 ;  The  Chicaijo 
Buildinp  Trades  Dispute,  111. 

Bond-secured  currency,   185. 

Bonds,  government,  172.  183,  184. 

Bonus   to  labor,   164. 

lioot  and  shoe  factories,  168. 

Bounty  on  shipping,   196. 

Bowley,  A.  L.,  Wages  in  the  United 
Kingdom  in  the  Nineteenth  Century, 
255. 

Brentano,  on  labor  contracts.  96. 

Brldgenmkers,  English,  60. 

British  :  Parliament,  100  ;  trade  unions, 
103,   110,   141. 

Brotherhoods,  the  railroad,   103. 

Building :  and  loan  associations,  171  ; 
Trades,  the  Chicago,  106. 

Bureau  :  of  Corporations.  78  ;  of  Labor, 
121  ;  of  Labor  Statistics,  the  New 
York.  136,  140  ;  of  LalX)r,  the  Massa- 
chusetts, 132;  of  Labor,  U.  S..  Bul- 
letin of.  140. 

Burns,  John,  on  collective  bargaining, 
112. 

Business :  administration,  schools  of, 
158;  depression,  137. 

Butler  Bros',  system  of  old-age  pen- 
sions, 146. 

Butter  factories,  22,  53. 

By-products,  utilization  of,  57. 

California :    Rochdale    stores    in,    169 ; 

Fruit  Growers  Exchange,  171. 
Uanada,     anti-dumping     provisions     in 

tariff  of,  240. 
Canal,  t^he  Panama,  46. 


263 


264 


Index 


Canals,   187.   193,   244. 

Cape  Cod  Canal,  194. 

Capitalism.  48.  249. 

Capitalistic :  methods  of  production. 
59.  153,  176 ;  production,  progress 
In,  47. 

Carnegie  pensions  for  superannuated 
college  and  university  teachers,  146. 

Carpenters'  union,  the  Chicago,  111. 

Carriages,  manufacture  of,  50. 

Causes  of  unemployment,  134. 

Census:  report  (1910)  on  manufac- 
tures, 65  ;  Thirteenth,  of  U.  S.,  50. 

Central  bank,  183. 

Centralization  of  industry.  187. 

Centralized  management,  62. 

Cereals,  20. 

Certificates  :  clearing-house.  85  ;  silver, 
181  ;   trust,   63. 

Charities,   246. 

Charity,  organization  societies,  records 
of.  135. 

Charter-granting  states.  77. 

Cheese :  production  of,  22 ;  factories. 
53.  171. 

Cliemlcal  poisons,  142. 

Chicago :  Building  Trades.  106 ;  car- 
penters' union,   111. 

Child  labor  :  early  origin,  117  ;  in  the 
West,  119  ;  the  evils  of.  125. 

Child-labor  law,  eight-hour,  127. 

Child-labor  laws,  128. 

Children  :  comp>etition  of,  126  ;  employ- 
ment of,  92,  97. 

China,  coal  deposits  in,  34. 

Circulation  of  money,  per  capita,  180. 

Civil  service  employes,  pensions  for, 
146. 

Clarlj,  John  B.,  on  trusts.  73. 

Class :  the  laboring.  104 ;  legislation. 
126. 

Class-consciousness,  93. 

Clearing-house  certificates,  85. 

Closed  Shop,  106. 

Clothing  :  ready-made,  60  ;  trade,  137. 

Coal :  an  exhaustible  resource,  29  ;  in 
U.  S.,  32-34  ;  in  coast-wise  trade, 
195  ;  Commission  Anthracite.  115  ; 
mines,  41.  248  ;  mining,  137  ;  oil,  34  ; 
supplies,  30  ;  trust.  250. 

Coffee  :  consumption  of,  259  ;  trust,  70. 

Coke,  52. 

Coking  coal.  36. 

Collars  and  cuffs,  52. 

Collective  torgaining.  102.  104,  107, 
in,  113.  114.  115.  122,  130. 

Colorado,   precious  metals  in,  38. 

Combination    movement,    62. 

Combinations  :  industrial,  72  ;  railroad. 
190. 

Commerce :  foreign.  195 ;  interstate. 
78. 

Commission  :  Anthracite  Coal.  115  :  In- 
dustrial, 56.  70.  75,  77.  137,  165  ; 
Industrial,  Report  of,  123,  134,  139  ; 
Interstate  Commerce,  78 ;  Merchant 
Marine.  196  :  National  Conservation, 
31  ;  Trade,  78. 

Commons,  J.  R.  :  on  division  of  latwr, 
50  ;  Trade  Unionism  and  Labor  Prob- 
lems.  111. 

Communism,  4. 

Community   of  interests,   188. 

Compensation  acts,   144. 


Compti'oller  of  the  Currency,  182,  185 

Compulsory :  accident  insurance,  144 
arbitration,  115  ;  education.  49,  128 
insurance,   145. 

Concentration,  industrial,  effects  of,  59. 

Conservation  :  a  rational  policy  of,  31  ; 
of  human  resources,   129. 

Consumers'  :  co-operation,  167.  170 ; 
leagues.   222. 

Consumption  :  the  relation  of,  to  pro- 
ductive efficiency,  221  ;  of  wealth  in 
the  United  States,  227. 

Continuation  schools,   128.  157. 

Contract :  freedom  of.  126.  244  ;  labor, 
95.  97.  98. 

Contraction  of  the  currency,  178. 

Contributory  negligence,   143. 

Co-operation  :  as  a  system  of  produc- 
tion, 167  ;  the  advantages  of,  172  ; 
consumers',  170;  disadvantages  of, 
173;  financial    171;  producers',  170. 

Co-operative  Wholesale  Society,  the 
English,    168. 

Coopers,  productive  co-operation  of,  in 
Minneapolis,    171. 

Corporate  franchises,   190. 

Corporations  :  Bureau  of.  78  ;  holding. 
63. 

Cost  of  living,  factors  of,  218-20."" 

Cotton  :  the  consumption  of.  152  ;  man- 
ufacturers, 53. 

Country   Life,   Commission  on,   31. 

Credit :    bills    of.    178 ;    economy,    176 
182  ;  facilities,  70  ;  function  o'f,  181 
insurance.  171  ;  theory  of  crises,  88 
use  of,  220. 

Crises  :  credit  theory  of,  88  ;  overpro- 
duction theory  of.  87  ;  recurrence  of, 
86  :  suD-sptit  theory  of,  86. 

Crisis,  analysis  of,  85. 

Culture  state  theory.   247. 

Currency  :  bond-secured.  185  ;  contrac- 
tion and  inflation  of.  178  ;  elasticity 
of,  183  ;  fractional,  181. 

Dairy  products  in  U.  S.,  18. 

Department :  of  Labor,  114  ;  stores,  58, 
17,3. 

Depression,   industrial,    135.    137. 

Diminishing  returns,  law  of.  27. 

Discrimination  in  rates.  189. 

Distribution  :  bases  for,  201  ;  of  for- 
tunes, 211;  Importance  of,  200;  of 
interest.  204-6  ;  kinds  of,  199  ;  prob- 
lems, 198  ;  of  profits.  206-7  ;  of  rent. 
202-4  ;  of  wages,  207-8 ;  of  wealth, 
234. 

Division  of  lalwr.  51,  57. 

Domain,   public,   10. 

Drink,  a  cause  of  poverty,  135. 

Earnings,  average,  of  men,  120. 

Economy  in  consumption,  220. 

Economic  functions  of  the  government. 
244. 

Economic  laws.   26. 

Economies  :  in  integration,  68  ;  of  large- 
scale  production.  56. 

Education  :  industrial.  156.  159.  160, 
198 ;  industrial,  in  Etigland,  158 ; 
industrial,  in  Germany,  157  ;  indus- 
trial, in  U.  S.,  158  ;  technical,  210, 
211. 


Index 


265 


EJight-bour  child-labor  law,   127. 

Elasticity  of  the  currency,  183. 

Electric :  intcnirbau  railways,  191 ; 
railway,  59. 

Ely,  R.  T. ;  on  taxation,  231 ;  ou  so- 
cialism,   248. 

Eminent  domain,  the  right  of,  190. 

Employer's  liability  act,  a  federal,  144. 

Employers  and  Workmen  Act,  the  Eng- 
lish,  100. 

Employment :  bureaus,  free,  139 ;  ir- 
regularity of,  153  ;  of  women,  119  ; 
of  women  and  children,  97. 

England,  industrial  education  in,  158. 

English  Co-operative  Wholesale  So- 
ciety, 168. 

Equitable  Pioneers,  167. 

Exchange,  California  Fruit  Growers', 
171. 

Exchanges :  produce,  171 ;  stock  and 
produce,  80,  249. 

Experiment :  Station  Act,  20  ;  stations, 
20,   21. 

Express  :    rates,    192 ;   system,    187. 

Pactoi'ies :  boot  and  shoe,  1G8 ;  tex- 
tile, 120  ;  tin  can  and  paper  Ixjx,  125. 

Factory :  acts,  97,  127 ;  detinition  of. 
49  ;  inspection,  140,  141. 

Fallacy  of  making  work,  224. 

Farming,  extensive  and  intensive,  19. 

Farm  :  products,  18  ;  tenure,  16. 

Farms,  size  of,  14. 

Federal :  employer's  liability  act,  144  ; 
Income  Tax,  235 ;  Reserve  Board, 
185;  Reserve  notes,  181,  185;  Re- 
serve Banking  System,  184 ;  treas- 
ury, 235. 

Federation  of  Labor,  the  American, 
103,   104,   165. 

Fellow-servant,  doctrine  of,  143. 

Feudal   society,  96. 

Financial  co-operation,  171. 

Fire:  insurance  companies,  171;  pro- 
tection, 127. 

Fisheries,  value  of,  25,  29. 

Fluctuations,  seasonal,  137. 

Foreign  commerce,  160,  195,  242. 

Forest  Reserves,  National,  25. 

Fortunes  :  large,  breaking  up  of,  234  ; 
in  U.  S.,  causes  of.  212  ;  size  of.  213. 

Franchises  :  and  regulative  powers  of 
the  state,   244  ;   corporate,   190. 

Free  employment  bureaus,  139. 

Free  trade.  48,  200,  238,  239. 

Freight :  discriminations,  70 ;  rates, 
189. 

Fruit  Growers'  Exchange,  California, 
171. 

Functions,  of  government,  243. 

Futures,   81,  82. 

Gas  Company,  South  Metropolitan,  and 

labor.  166. 
Geological  Survey,  U.  S.,  32. 
George,    Henry,    on    distribution,    201, 

202  ;  on  single  tax,  253. 
German  :  industries,  causes  of  accidents 

in,  142  :  group  of,  trade  schools.  159  ; 

socialists.   93. 
Gold  :  supplies  of,  38  ;  and  money,  179- 

80 ;    certificates,    181 ;    -mining,    38 ; 

standard,  180. 


Gompers,  Samuel,  President  of  Amer- 
ican Federation  of  I>al>or,  165. 

Government :  functions  of.  243  ;  paper 
money,  180. 

Governmental  regulation  of  railroads, 
190. 

Greenback   party,   178. 

Greenbacks,  178,  181. 

Guild  system,  93. 

Half-holidays,  110. 

Harvester  Company,  International.  146. 

High   schools,   industrial,   159. 

Holding  corporations,   63. 

Homesteads  and   land  distribution,   11. 

Human  resources,  conservation  of.  129. 

Husbandry,  patrons  of,  169. 

Idleness,  causes  of,  136. 
Immigration  and  unemployment,   139. 
Improved  land,  percentage  of,  in  states. 

Incomes,  220,  229,  249,  252. 

Income  tax :  .lustiflcation  of,  207 ;  as 
a  source  of  revenue,  238 ;  Federal, 
235  ;   returns,    211. 

Increasing  returns,  law  of,  26. 

Increment,  the  unearned,  204,  253. 

Indemnity  insurance  companies,  144. 

Individualism :  as  state  action,  245 ; 
modified,   247. 

Industrial :  accidents,  140,  147 ;  con- 
centration, effects  of,  59 ;  develop- 
ment of  the  South,  125 ;  education 
and  training,  156 ;  progress,  causes 
of,  48  ;  Revolution,  6,  257. 

Industries:  of  Increasing  returns,  187; 
infant,  239    241. 

Intlatiou  of  the  currency,  178. 

Inheritance  taxes,  237,  238,  259. 

Inheritances,  248. 

Inland  Waterways,  Commission  of,  31. 

Institute,  Zion's  Co-operative  Mercan- 
tile, 169. 

Insurance  :  accident,  141  ;  against  sick- 
ness, old  age,  and  unemployment, 
145  ;  against  unemployment,  139 ; 
compulsory  accident,  144 ;  working- 
men's  and  unemploj-ment,   147. 

Intensive  cultivation,  59. 

Interchangeable  parts,  59,  GO. 

Interest,  a  factor  in  distribution,  204-6. 

Interstate  Commerce  Act,  190. 

Iron  law  of  wages  theory,  207,  208. 

Irrigation,  11,  14,  134. 

Joint-stock  enterprises,  174. 
Journal  of  Commerce,   New  York,  sta- 
tistics on  trusts  of,  66. 

Knights  of  Labor.  103,  200. 

Labor :  agricultural,  110 ;  American 
Federation  of,  103,  104,  165  ;  bar- 
gaining power  of,  98  ;  bonus  to,  164  ; 
Bureau  of,  121.  141  ;  child,  124  ; 
conditions  of,  244  ;  conditions,  public 
regulation  of,  97  ;  contract,  95,  97, 
98 ;  cost  of,  219 ;  Department  of, 
114  ;  disturbances,  163  ;  division  of, 
49,  .50,  5il.  57 :  freedom  of,  105  ; 
hours  of,  127,  165;  Knights  of,  103, 
104  ;  market,  99,  104,  106,  139  ; 
Massachusetts    Bureau    of,    132 ;    mi- 


266 


Index 


gratlon  of,  209 ;  of  women,  123 ; 
organizations,  102.  110,  128,  136; 
pauper,  240 ;  -saving  devices,  209 ; 
-saving  machinery.  48,  49.  52,  112, 
155  ;  statistics.  New  York  Bureau  of, 
136,  140. 

Laborers,   Statute  of,  96. 

Land :  grants  of,  to  railroads,  190 ; 
policy  of  U.  S.,  10 :  unearned  Incre- 
ment of,  207  ;  values,  213. 

Lands,  public,  11. 

Large-scale  production,  economies  of, 
56. 

Law  of  diminishing  returns,  27. 

Law  of  increasing  returns.  26. 

Laws  :  anti-trust,  77  ;  child-labor,  127  ; 
economic,  26;  labor,  100;  minimum 
wage,  130  ;  sanitary.  219. 

League.  Right  Relationship,  1G9,  173. 

Leagues,   Consumers',   222. 

Leclaire,  Maison,  profit-sharing  plans 
of,  163,  166. 

Legislation :  currency.  89 ;  factory, 
100,  125 ;  protective,  the  necessity 
of,  99  ;  restrictive,  125  ;  special,  172. 

Leisure,  219. 

Liability  act.   employer's,   federal.   144. 

Liability  insurance  companies,   141. 

Liens,   mechanics',   127. 

Liquor,  expenditure  for,  U.  S.,  annu- 
ally, 227. 

Living,  cost  of,  217  ;  standard  of,  220, 
228  ;  woman's  standard  of,  121. 

Loan,  building  and,  associations,  171. 

Loan-sharks,  222. 

Lump-of-labor  theory,  224. 

Machine  production.  76,  102.  117,  143. 

Machinery  :  automatic,  60  ;  labor-sav- 
ing, 52,  112. 

Making  work,  the  fallacy  of,  224. 

Malthuslan  theory,  208. 

Management :  centralized,  62  ;  collect- 
ive. 250. 

Manufactures:  census  report  on  (1910), 
65 :  growth  of.  in  19th  Century,  47. 

Manufacturing,   large-scale.   174. 

Margin   trading.   83. 

Marine.   American   Merchant.   194. 

Massachusetts  Bureau  of  Labor,  132. 

Meat-packing  industry.  50,  57. 

Mercantilism,  247. 

Mechanics'  liens.  127. 

Merchant  marine :  the  American.  194  ; 
Commission.   196. 

Metals,  precious,  38. 

Metropolitan  Gas  Company.  South, 
166. 

Mineral  resources  of  U.  S.,  29. 

Minimum  wage  laws,   130. 

Monev :  kinds  of.  In  U.  S..  181 ;  per 
capita  circulation  of,  180 ;  value  of, 
176. 

Monometallism,    179. 

Monopoly :  control.  74  ;  evils,  78 ; 
power"  of  labor,  209  ;  power  of  rail- 
roads, 191. 

Municipalization,  253. 

National :  bank-notes.  181  ;  banks,  182- 
84  ;  Conservation  Commission,  31 ; 
Forest  Reserves,  25  ;  resources,  210. 

Natural  :  gas.  36  ;  monopolies,  43 ;  re- 
sources, 26,  173. 


Negligence  :  acts  of.  143 ;  contributory. 

143. 
New  York  :  Bureau  of  Labor  Statistics. 

136,   140:  Journal  of  Commerce,  66. 
Non-union  shops.  107. 
Notes,  Federal  Reserve.  181,  185. 

Occupations :  classified  index  of,  50 ; 
followed  by  women,  118;  of  men, 
effect  of  woman  labor  upon,  119 ; 
statistics  of,  119 ;  unhealthful.  128, 
135. 

Oil-refining  industry,   57. 

Old  age :  Insurance.  145 ;  pensions, 
260 ;  pensions  in  U.   S.,  146. 

Organization,  Individual  and  partner- 
ship, 64. 

Output,  restriction  of,  110. 

Overproduction  theory  of  crises.  87. 

Ownership  1  :  communal,  4  ;  private,  3  ; 
public,   173,  253;  state,  253. 

Panic  :  analysis  of,  85  ;  theories  of,  86  : 
Wall  Street,  86. 

Paper  money,  government.  180. 

Parcel  iK)st  system,  192. 

Partnership  organization,  64. 

Patrons  of  husbandry,  169. 

Pauperism,  219. 

Pauper  labor,  240. 

Pensions  :  Carnegie,  for  superannuated 
college  and  university  teachers,  146  ; 
old-age,   260;  old-age,   in  U.   S.,  146. 

Pensions  systems,  private,  objections 
to,  146. 

Personal  property,  tax  on,  236. 

Piecework  and  labor  unions,  107,  111. 

Pioneers.   Equitable.  167. 

Poisoning.   Industrial,   142. 

Pooling,  among  railroads,  187,  188. 

Pools,   industrial,  63. 

Population,  growth  of.  207,  208. 

Postal  savings-banks.  185. 

Poverty,  135,  140.  145,  199,  213.  257. 

Premium  wage  systems,  165. 

Prices  :  monopoly  control  and,  74  ;  and 
values,  177  ;  determined  by  the  state, 
252  ;  rising  and  falling,  178. 

Problem,   labor,   174. 

Produce  exchanges.  80.  171. 

Producers'   co-operation,    167,   170. 

Producers'  co-operative  marketing  so- 
cieties, 171. 

Production  :  capitalistic,  7,  45,  46,  100, 
102,  153,  176;  progress  in,  47. 

Productivity   theory  of  wages.   208. 

Profits,   206-207. 

Profit-sharing  :  advantages  of.  163  ;  fu- 
ture of,  166;  nature  of,  162-67;  ob- 
jections to,  164. 

Property,  personal,  tax  on,  236. 

Property  tax,  general,  236. 

Protection  :  and  free  trade,  238-41 ; 
and  monopoly,  212 :  relation  to  In- 
dustrial progress.  48. 

Public  :  debts.  238  ;  domain.  10  ;  own- 
ership of  railroads.  191 ;  ownership 
of  telegraph  and  telephone,  192. 

Pure  food  laws,  219. 

Railroad  :  brotlierhoods.  103  ;  combina- 
tions, 187,  190;  rates,  189,  261; 
steam,  59  ;  traffic,   152. 


Index 


267 


Railroads  :  the  governmental  regulation 
of.  190 ;  tlie  public  ownership  of, 
191. 

Railway  :  electric,  59  ;  pool,  f.3. 

Railways :  electric  interurban,  191  ; 
EYencb,  62  ;  steam,  56  ;  street,  254. 

Rate  of  wages  :  standard,  106  ;  union, 
111. 

Rates,    railroad,    189.   261. 

Real  estate,  tax  on,  236. 

Recreation,  216-18. 

Reduction  of  working  hours,  108. 

Regional  reserve  banks,   185. 

Regiilation :  of  labor  conditions,  97 ; 
of   railroads,   governmental,    190. 

Relationship    Iveague,    Right.    160. 

Remedies   for   unemployment,   138. 

Rent :  nature  of,  202-4  ;  and  cost  of 
living,    216-18 :   and   single   tax,    253. 

Reserve  banks,   regional,   185. 

Resources :  agricultural,  48 ;  agricul- 
tural, of  U.  S.,  10 ;  human,  conserva- 
tion of,  129;  national,  210;  natural, 
29,    173. 

Rest :  one  day  of,  in  seven,  129 ;  pe- 
riods of,   129. 

Restriction  of  output,  110. 

Right :  of  eminent  domain,  190 ;  per- 
sonal and  property,  126 ;  Relation- 
ship League  of  America,  169,  173. 

Risk,    assumption    of,    143. 

Rochdale  :  stores,  169  ;  Wholesale  Com- 
pany,  169. 

Rotation  of  crops,  22. 

Safety   devices,    141. 

Sanitary  :  conditions,  99  ;  laws,  219. 

Saving  and  spending,  222. 

Savings,    useful.    225. 

School    attendance,    126. 

Schooling,  compulsory,   128. 

Schools :  agricultural,  159 ;  business 
administration,  158  ;■  continuation, 
128,  157 ;  correspondence.  159 ;  in 
Germany.    157 ;   trade.    160. 

School-teachers,    pensions   for,    146. 

Scottish  Wholesale  Society,  168. 

Serfdom,   5,   95,   96. 

Sexes,   proportion  of,   119. 

Shut-downs.   134.   137. 

Sickness:  and  unemployment,  134,  136, 
139  ;  Insurance,  145,  147. 

Silver:  certificates.  181;  coinage  of, 
178;  dollars.  181;  -mining,  38. 

Single   tax    200,   253. 

Slldlng-scale  of  wage  payment,  165. 

Socialism,  248-53. 

Socialization  of  wealth,  229. 

Societies :  financial,  171  ;  producers' 
co-operative  marketing,   171. 

Society :  the  Etigllsh  Co-operative 
Wholesale,  168 ;  feudal,  96 ;  im- 
provement of,  124 ;  manorial,  2 ; 
Rochdale,  169 ;  Scottish  Wholesale. 
168  ;  welfare  of,  127. 

South  :  Industrial  development  of.  125  ; 
Metropolitan  Gas   Company,   166. 

Specialization  of  lalwr,  156. 

Speculation,  stock  exchange,  184. 

Spending,   215,    220,   222. 

Standardization  :  In  Industry.  59 ;  of 
wages,   110. 

Standard  of  living,  122,  228. 

Standard  Oil  Trust,  63.  65,  70. 


Standard  wage,   107. 

State:  functions  of,  243;  night-watch- 
man theory  of,  246  ;  regulative  func- 
tions of,  244. 

Statistics  :  of  accidents,  142  ;  of  farm 
tenure,  16 ;  of  Industrial  accidents, 
140 ;  of  occupations,  110. 

Statute   of  Ivaborers,   the,   96. 

Steel :  business,  pensions  in,  146  ;  Cor- 
poration, U.  S.,  68,  146.  166;  and 
Wire  Company,  American,  68. 

Stock-exchange   speculation,    184. 

Stock   exchanges,   80. 

Stores  :  consumers'  co-operative,  170 ; 
department,   173 ;    Rochdale,   169. 

Sun-spot  theory  of  crises,  86. 

Superannuation,    136. 

Supply  and  demand,   208. 

Sweated  trades.  111,  222. 

Tariff  :  laws,  219  ;  rates,  236. 

Tax :  B^ederal  Income,  235 ;  general 
property,  236  ;  single,   200,  253. 

Taxation,   bases   of,    233. 

Taxes  :  defined,  231  ;  direct  and  Indi- 
rect. 235  ;  inheritance,  205.  237,  238, 
250;  nature  of,  231;  progressive, 
233. 

Tenantry,  16. 

Tenements,   222,  244. 

Theory  :  credit,  of  crises,  88 ;  over- 
production, of  crises,  87 ;  .sun-spot, 
of  crises.  86. 

Tobacco,  exT)endlture  for,  in  U.  S.  an- 
nually, 227. 

Trade:  expansion  of,  138,  177;  foreign, 
195,  196  ;  free,  48,  200  :  -marks,  244  ; 
restraint  of,  77 ;  schools,  157,  159, 
160 ;  union  methods  and  policies, 
160. 

Transportation  :  companies,  188  ;  facili- 
ties, 48  ;  water,  103. 

Trust :  and  capibUlstic  production,  6 ; 
certificates.  63 ;  organization.  76 ; 
problem,  53 ;  promotion,  69  ;  Stand- 
ard on,  63. 

Trusts,  causes  of,  66. 

Undernutrition,   228. 

Unearned  increment,  204,  207.  253. 

Unemployed,  classification  of,  133. 

Unemployment :  causes  of,  134  ;  insur- 
ance,  145,   147  ;   remedies  for,  138. 

Unhealthful   occupations,    128,    135. 

Union   wages,   111. 

Unions,   trade  and  labor,  104. 

United  States  :  consumption  of  wealth 
In,  227 ;  Geological  Survey.  32 :  in- 
dustrial education  in,  158 ;  mineral 
resources  of,  29 ;  Steel  Corporation, 
68,   146,   166. 

Universities,  technical  departments  of, 
158. 

Value :    Marxian    theory    of,    252 ;    of 

money,  177. 
Vice,  l34. 

Wage :  contract,  evolution  of,  95 ; 
-earners,  260 ;  -earners,  women,  121  ; 
-earning  class,  92,  102 ;  minimum, 
laws,  130;  minimum,  legislation, 
129;  scales,  113;  system,  modern, 
91.    126. 


268 


Index 


Wages  :  and  distribution,  207-8  :  high 
In  U.  S.,  210  ;  men's.  122  ;  women's, 
120,  123 ;  standardization  of,  110 ; 
union  rate  of.   111. 

Wall   Street   panic.   86. 

Waste :  of  luniries,  225  ;  products,  57. 

Water-power.   29,   40,   41. 

Water-power  trust,   43. 

Waterwa.vs :  and  canals,  194  ;  Inland, 
48,   193. 

Wealth  :  accumulation,  improper  meth- 
od.s  of,  213 :  consumption  of,  in  U.  S., 
227 ;  distribution  of,  198.  205,  226, 
234  ;  ine^iuitable  distribution  of,  155  ; 
of  nations,  47 ;  production  of,  124, 
178,  198,  225  ;  rational  use  of,  215  ; 
socialization  of,  229. 

Welfare,  social  and  Industrial,  231. 

Whisky  :  pool,  63  ;  tax  on,  235  ;  trust, 
67. 

Wholesale  Society :  English  Co-opera- 
tive. 168;   Scottish,  168. 

Wholesaler,  168. 


Woman  :  ambition  of,  120 ;  economic 
position  of,  in  the  world,  121  ;  effi- 
ciency of,  120 ;  expectation  of  mar- 
riage of,  120;  labor,  117,  118,  120: 
labor,  effects  of,  122;  labor,  efifect 
of,  on  occupations  of  men,  119  ;  lower 
wages  of,   120. 

Women  :  employment  of,  92,  97,  119 ; 
field  of  employment  for,  118;  indus- 
tries of,  122  ;  occupations  followed 
by,  118;  wages  of,  120,  121;  wage- 
earners,   121  ;  work  of,  124. 

Work  :  the  fallacy  of  "making,"  224 ; 
monotony   of,   154 ;    specialized.    154. 

Working  day:  length  of.  110;  length 
of,  for  women  and  children.  128. 

Worklngmen's   Insurance,    147. 

Workmen's  compensation :  and  em- 
ployers' liability,  143  ;  act.  144. 

Zion's  Co-operative  Mercantile  Insti- 
tute, 169. 


This  book  is  DUE  on  the  last  date  stamped  below 


A\3t5  22  IS® 

JAN  4    1957 
i^lAY^     1958 

MOV  t8  IflW 


Form  L-9-35)n-8,'28 


HB 
171  Bogart  - 
B63b  Bus  ines  s_ 


economics. 


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UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


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